Cost Accounting, R.I.P.: Cost Accounting is an Opinion—Cash Flow is Fact
In many enterprises today, there is too much focus on cost accounting data and not enough on understanding the factors that influence the data. Since you can calculate different costs using the same data it’s obvious that costs do not represent cash.
Cost accounting confuses metrics with measurements, while companies spend an enormous amount of money to allocate costs that have nothing to do with cash.
There are three primary reasons cost accounting is a bad practice:
You have to create and force math and relationships that do not exist.
By doing this, you lose touch with your operations.
You create meaningless numbers that people consider as gospel, when in reality they are nothing but opinions.
The lesson is that a company needs to start with value, then determine price, which finally justifies the costs that can be profitably incurred to produce a good or service desired by customers. Costs are, no doubt, important to consider, but the crucial distinction is when they are considered, and what measures are to be used.
Learning Objectives
Why modeling cash flow and capacity is superior to cost accounting
The Adaptive Capacity Model
The difference between metrics and measurements
Segall’s Law
