Charge Performance Costs to Results produced to manage Value-added

Conventional cost management structures raise several questions

An article in the Business Change Forum on 31 March 2006, discussed How to know the total of all costs and charge costs to the right things.

The article noted two big questions concerning conventional cost accounting methods:

1. Are we gathering all of our costs?
2. Are we charging our costs to the right things?

Conventional enterprises have many “unknown costs”

The first question; Are we gathering all of our costs, raises two problems:

1. We are incurring many “unknown costs”, costs that we don’t measure and capture
2. We do not have one entity that defines our costs, so we have to cost various entities that we can think of or “known costs”

Today, virtually every enterprise has “intangible assets”. Intangible assets really are unmanaged capital that we utilize in our performance. So we spend a lot of time and money capturing known costs of tangible assets and neglect the even more important unknown costs of intangible assets.

Today’s costs arise from separate entities, rather than one manageable entity that consistently generates costs

Enterprises cost separate entities like assets, employees, supplies, payables, etc. This haphazard approach does not have a baseline to define all of the costs we incur, and allows us to skip costs that we do not understand.

The referenced article says that costs are incurred through the consumption of capital in performance. So the only thing we should cost is capital consumed in performance. If we are consuming capital, we need to document and manage all the capital that is consumed, like processes, people, information, cash, and equipment. Capital is utilized in performance through our performance solutions. So we should measure costs by performance solution.

We must define all of our performance solutions to gather all of our costs

The problem is that we have never defined our performance solutions. If we precisely identify and define our performance solutions, we will have one entity that includes all of our tangible and intangible assets and defines all of our costs.

So, when we define our performance solutions properly and measure the costs of developing, operating, supporting, and utilizing our solutions, we can answer our first question.

Conventional enterprises charge costs to the wrong things

The second question; Are we charging our costs to the right things? Here we have two problems

1. We have contrived many cost accounting methods and charge costs to many entities, but they have never provided the right answer
2. We don’t have one entity that describes what we produce with the costs we incur, so we charge to various entities that we can think of

We have many conventional methods of cost accounting. We cost processes, activities, stations, products, centers, and other entities. But, are these the proper entities to charge for our performance costs?

To answer this question we should do some simple thinking that we have never done. The referenced article asked; what do these performance costs produce? And then said; once we understand this then we can understand the totality of our costs and begin charging our costs to the right thing.

We do not incur costs to be responsible or to have an activity; we incur costs to create value in results

When we consume capital in performance, we incur costs. We do not perform for the sake of performing; we perform to produce results or economic outputs from our performance. Therefore, we should charge our performance costs to the products and other results we produce.

Today’s value is created in separate entities, rather than one manageable entity that consistently creates value

Now we face the second problem. We have never defined the results that we must produce for the success of our enterprise. This has been a serious problem since the very start of business. The results we produce contain our quality and value. We define material, products, sales, revenues, and profits as separate entities that we manage on their own, but we have never defined the results produced across the enterprise as one set. If we define our results properly, we will have a baseline for all the entities that incur costs and produce value.

So, when we define all our results and identify all the performance solutions utilized to produce the results, we can answer our second question. We need to charge all performance costs to the results produced.

R-pM manages costs of capital consumed in performance solutions against the value created in results, to manage the value-added

The capability to charge all performance costs to the results produced is provided by Result-performance Management (R-pM) by organizing business results and performance solutions into one integrated business structure for 21^st Century Management. R-pM enables us to utilize capital in performance to incur costs, to produce value in results, and to manage the value-added.

Visit Result-performance-Management.com to learn more about organizing your business with R-pM for 21^st Century Management, and the R-pM Toolkit, your 21^st Century Management Manual.