How to know the total of all costs and charge costs to the proper entity

Do cost accounting methods capture all costs or charge the costs against the proper entity?

There are many methods of cash expenditure and cost accounting. We cost objects, processes, activities, stations, products, centers, and other entities. But, is there one entity that we really should be costing in terms of incurring costs and one entity that we should be charging to absorb and manage our costs? Do we really know if we are identifying and capturing all of our costs?

Cost accounting must measure the cost of capital consumed or utilized in performance

We continually make investments to acquire, develop, improve, maintain, and support each capital solution. Costs are incurred through the consumption and utilization of capital in performance. Costs are incurred to reduce the balance invested in the capital utilized to zero over the useful life or planned costing period. So the only entity we should cost is capital consumed or utilized in performance. If we are consuming and utilizing capital, we need to document and manage all the capital that is consumed or utilized, like processes, personnel, capabilities, information, strategies, and equipment. Capital is utilized in performance through specific capital solutions. So we incur costs and accumulate costs incurred by capital solution.

But we do not know all of our costs today, because most of our capital is not identified or managed as capital solutions. We have “intangible assets” and incur costs to create other capital solutions that are never recorded as capital.

Cost accounting must charge costs against the value created by the performance

But, what entity should we charge for our costs? What do these performance costs produce as the objective of incurring the cost? Our performance costs do not produce objects, centers, activities, or stations. The objective of cash expenditures is not the capital solution consumed or utilized. The only objective of consuming or utilizing capital in performance is to create value in the output results produced from performance. The only valid entity to be charged for our cash expenditures or costs is the output result produced directly from the performance. Product is one example of a result that can absorb costs. Once we understand this then we can understand the totality of our costs and begin charging our costs to the proper entity.

Result-performance Management organizes the business to know capital investments, performance costs, and result value-added.

The answer is Result-performance Management (R-pM) to organize the business to manage results of known value that must be produced for business success, the capital solutions of known investment and uncharged balance available to be utilized, and utilization of solutions in performance to incur known costs to produce specific results and known result value-added.

Each counted volume of a result has a value paid by the result customer. Each capital solution has a zero or greater uncharged balance from the total investment made. Each capital solution incurs the cost of performance in the reduction of the investment balance, when utilized to produce a result volume. The total performance costs for all solutions utilized to produce a volume of a specific result is the result cost. The result value less the result cost is the result value-added. Result value-added is managed to be positive along result chains and across the business to contribute to and manage the profit result.

Use R-pM to manage your business and eliminate 20^th century management problems

Result-performance Management (R-pM) focuses information technology utilization on the actual business to eliminate the cost accounting problem and other costly 20^th century management problems. Slash overheads and costs, simplify business management, and boost competitive advantage through R-pM, the conventional method for 21^st Century Management.

R-pM is documented in The R-pM Toolkit, which is available today and is under continual development to expand and refine R-pM and 21^st Century Management conventions and standards. The R-pM Toolkit is offered at a nominal price to encourage wide use of R-pM. Subscribe to your R-pM Toolkit, and future updates, at result-performance-management.com.

This entry was posted on Friday, August 22nd, 2008 at 01:23 and is filed under:
Forums: Administration and Capital Management, Organization and Management
Topics: Cost Management, IT Organization and Delivery
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