Cost tracking, productivity and profitability · Lesson 4 of 4

Cost tracking, productivity and profitability: defects, verification and case study

Late postings and catch-all codes, estimate and actual on different bases, indexes that can be wrong, managing to the variance, a weekly set of checks, a case study of an optimistic labor-hour assumption, and what a job-cost packet holds.

You will be able to: Diagnose a cost-tracking defect, verify the data before trusting an index, learn from a documented estimate that assumed too much improvement, and document the evidence for review.

13 min · 12 slides · 9 questions

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Slide 1 of 12

Late postings and catch-all codes

GAO says a favorable cost variance should be checked, because actual cost may not be recorded yet when accounting accruals lag behind invoice payments.

Hours coded to a catch-all such as "Shop" are no longer traced to any job, so every job looks cheaper than it was.

Late postings and catch-all codes both make the data look better than the work was.

Sources

Cost Estimating and Assessment Guide: Best Practices for Developing and Managing Program Costs (GAO-20-195G, March 12, 2020) - written for major federal programs; its formulas are generic, its dollar scale is not - U.S. Government Accountability Office
8.5 Describe How Companies Use Variance Analysis - OpenStax, Principles of Accounting, Volume 2: Managerial Accounting

Glossary

Basis: What a number counts. An estimate and its actual must count the same thing, for example a flat width with a hem allowance added, or the comparison shows a variance that is only a difference of counting.
Lagging accruals: When accounting entries trail the invoices and payments for work done, actual cost looks lower than it is. GAO says favorable cost variances should be checked for this.
Level of effort: Credit for time spent rather than for output made. GAO says it is not objective and should be scrutinized if it makes up more than about 15 percent of a budget.
Managing to the variance: Making decisions to meet a variance report rather than the long-run interest of the company, which OpenStax warns can happen when standards are set improperly.
Direct cost: A cost specifically identified with one cost objective, such as a job, and charged directly to it (the idea in FAR 31.202). Hours with no job on the ticket cannot be charged this way.