- June 6, 2020
- Posted by: Editorial Team
- Categories: Blogs, Finance & accounting
“Interpretation of cost is not the same for everyone,” rationally argued a large company CFO. True understanding of cost varies widely based on the method ,scope of activity and time period. For instance, cost accountants using activity-based-costing opt to carry specific direct and indirect activities to manufacture a widget, but decide cost based on a monthly average or some other timeline. Whereas, benchmarking cost of procurement function and invoice process quite varies month over month based, but the general scope remains untouched. In diversified firms’ nature of business and volume may differ, making it problematic to manage a dependable cost interpretation. In geographically disputed company, cost is illustrated in local currency that may serve a biased view even when common currency such as USD is followed.
The basic challenge is to agree on a logical cost definition acceptable across the organization performing comparable tasks. Division leaders with P&L responsibilities could debate the virtues of inclusion (or exclusion) that is valuable to his performance objectives.
Next, assumptions required in cost calculation varies based direct and indirect cost dependencies. Since the rationale of cost stays intact for a lengthier period, managers often choose to include more attributes that impede the cost equation, contributing to possibility of padding numbers in the future. In other words, the estimates may entirely be different from realism.
When cost attributes are based on work effort such as services, reliable cost is less likely to match the true estimates. Whereas cost based on material exchange, true cost more or less remain unchanged. In the business world, both types of transactions are described as cost.
Efforts to bring material cost is straight forward – determine alternate lower cost vendor to find highest achievable quality to stay competitive. These efforts show-up financial in the footnote.
Cost to process transactions such as procurement, vendor processing, material handling, remains elusive as the employee cost includes salaries, benefits and real-estate. Plus the true efforts vary greatly based on individuals and their competences to process transactions. If the volume breaks down, the cost savings will reduce. As a result, cost saving from process improvement rarely comes up in the financial reports even when the initial cost savings are massive.
There is one other reason for cost saving not expressed in the financial reports. Labor cost savings, say moving full-time to part-time employees come up under wages and not expenses.
Companies adopting RPA realize greater cost benefits and cash-flow improvement as automation contributes to dispose labor cost, making cost per transaction consistent across the business irrespective of the processing capacity, volume and seasonality. RPA solves two significant cost issues in a single sweep.