Focus and Leverage Part 381

Before I leave the subject of accounting and comparing traditional Cost Accounting (CA) to the relatively new form of accounting, Throughput Accounting (TA), I want to write a bit about why we have these two conflicting methods.  I also want to let you know about a wonderful new book by Debra and Chad Smith (mother and son) entitled, Demand Driven Performance, Using Smart Metrics,  I absolutely encourage all of my readers to get this book because I believe it has the possibility of "changing the landscape" in today's business world.  Specifically, I want to recommend their Chapter 7, Our Current Accounting Measuring Mess.

In their book, Debra and Chad explain the difference between relevant and irrelevant information with the bottom line being that although Cost Accounting information is relevant for financial reporting based upon GAAP reporting requirements, it is absolutely irrelevant in terms of real time financial decisions.  In this book they write, "Managerial Accounting is concerned with providing information to managers - that is, people inside an organization who direct and control its operations,  In contrast, financial accounting is concerned with providing information to stockholders, creditors, and others who are outside an organization.  Management accounting provides the essential data that are needed to run organizations.  Financial accounting provides the essential data that are used by outsiders to judge a company's past financial performance.  Managerial accountants prepare a variety of reports.  Some reports focus on how well managers or business units have performed - comparing actual results to plan and to benchmarks. Some reports provide timely, frequent updates on key indicators such as orders received, order backlog, capacity utilization, and sales.  Other analytical reports are prepared as needed to investigate specific problems such as decline in profitability of a product line.  And yet other reports analyze a developing business situation or opportunity.  In contrast, financial reporting is oriented towards producing a limited set of specific prescribed annual and quarterly financial statements in accordance with generally accepted accounting principles (GAAP)."

They go on to state that "Financial accounting was created to comply and be governed by a regulating body known as the Securities and Exchange Commission, the SEC."  The Smith's also tell us that we should remember that the entire purpose of cost accounting and financial accounting is to report a company's past performance in a manner consistent with GAAP requirements.  So what's my point in this posting?  My point is that Cost Accounting was never intended to be used to make routine decisions, but rather to provide a framework for comparing financial performance between companies or between time periods within the same company.  The problem is, reporting based upon GAAP is like trying to drive a car by looking in your rear view mirror instead of what you see now versus the future.  Managers need a way to judge their actions and organizational results in real time and Throughput Accounting provides that method.

In my experience, throughout my career, if I had to eliminate one performance metric from the landscape it would be manpower efficiency.  It's a great metric if you are judging the performance of the constraint, but in non-constraints it simply moves organizations in the wrong direction.  In my next posting, I want to continue on with some valuable lessons taken from Debra and Chad Smith's wonderful new book, Demand Driven Performance.
Bob Sproull