I got a fascinating message by email today that I want to share with you all. At the end of the message is my reply. See what you think!
Message TO me:
Dear, Mr. Williamson!
I have stumbled upon your homepage via Google search. The reason why I have done that is because I am working on the Thesis. It is dealing with the problem of maximizing the profit of a company X, within a concern Y.
The thing is that I work for a manufacturing company, that is a producer of a household products. And I would like to use Excel modelling to help our managers with a sensible peace of advice, about maximizing profits. The fact that we are part of a bigger concern and deal with only production puts some limitations e.g. our transfer price is fixed. We sell all of the finished goods to a distribution center (so we have only one client) and the profit would be everything we produce cheaper than a transfer price. The problem I see is that our cost price was calculated many years ago and it utilizes outdated principle, when naked price of labor and materials is increased with a fixed percentage of transportation costs, marketing costs etc. I find it very disturbing to read such a cost price, and definition of additional expenses with a fixed rate percentage might be misleading for the management.
The question is can you please advice some good reading? I might say that all of the articles (like "Linear Programming and Excel's Solver") that could be found on your website are quite good, but nothing new to me, as this was a part of financial class at the college I study in. Any book with some insights and tools how to make a company more profitable would be of a use!
The second question is that ok, if I build a model for a whole factory this would be nice, but it does not cut our costs. If I would come up with a proposal how to economy on let's say painting (use thinner paint job for the products, with same level of quality) would be more useful, but the model itself does no tell you where to "tighten the screw". One of the solutions would be to make economies on taxes. With our existing cost price calculation we make around ~12% profits of net sales. And we should pay a company income tax. If we can build a costprice that would lead us to a 3-5% profit, we would economy a huge amount in income tax, and we could decide to make profit in an other unit (we are a concern and might utilise our Hong Kong branch where CIT is very low). But this is the only opportunity I see for company X to maximize it's profit within concern Y. Maybe you can advice me something better?
Any information would be helpful. And I would like you to thank you for the presentation found on your website :Cost Model Building: a simple example" because it explains cost model building in plain words and makes it easy to understand. I might use your ideas for a presentation if I write a good thesis.
Best regards,
A M
Message FROM me:
Thanks for your very interesting message A.
What you have found is typical of the situation in many companies and probably all over the world.
The problem is the lazy accountant who cannot and does not understand where he is and what his company is doing. So it's good to hear that you want to break the mould.
As for reading, I think the best advice is for you to read and consider the differences between traditional cost accounting that you seem to be describing and the more modern alternatives such as activity based costing, time driven activity based costing and even things like the balanced scorecard and so on. I think you already know about these things but if you think carefully about how you can apply them in your own situation you will benefit a great deal.
Again I think you already appreciate that you NEED to understand all products and processes at your place of work before you can solve the problems you have outlined to me. Your biggest ally, by the way, is probably not in your accountant's office but in the factory. Your engineers, production management, stock controllers ... they are most likely the people who are of most benefit to you: learn what they know and it will be a good start for you.
As for saving costs, I would take a different approach: you MIGHT convince someone to thin down the paint, to find alternative suppliers, cheaper labour and so on but think this way. By generating a proper, more rational and scientific cost accounting system, you will demonstrate and reveal the reality of the situation your company is in. If you can then convince your management that what you have prepared really is valuable then they would be stupid to ignore your findings. Your new costs per unit and so on, your departmental cost schedules and all of the other value adding material you will be providing will be an eye opener for them that they cannot resist!
I have worked with people who think that cost accounting is nonsense: that is until I show them that I understand what they do and what they need; I then show them my product cost model and what it can do for them. Then they wake up! Very satisfying!
I hope you find that useful and would love to hear more about your products and services and where in the world you are!
Best wishes
Duncan Williamson
