Special Guests

Douglas T. Hicks CPA 

has been helping organizations realized the benefits of accurate and relevant managerial costing information for thirty-four years through his consulting projects, books, articles, courses and presentations. 

He’s a member of the Institute of Management Accountants and serves on the Advisory Board of its Center for Managerial Costing Quality (www.thecmcq.org).  You can learn more at his website: www.dthicksco.com.

The Navigator and the Management Accountant

Douglas T. Hicks, CPA

About two centuries ago there was a navigator who served on a ship that regularly sailed through dangerous waters.  It was this navigator’s job to make sure the captain always knew where the ship had been, where it was, and how to safely and efficiently move the ship from one point to another.  In the performance of his duties, the navigator relied on a set of sophisticated instruments.  Without the effective functioning of these instruments, it would be impossible for him to chart the safest and most efficient course for the ship to follow.

One day the navigator began to suspect that one of his most important instruments was calibrated incorrectly.  If his suspicions turned out to be correct, the navigational information he provided to the captain – information on which the captain based the decisions necessary to safely and efficiently direct the ship – was inaccurate.  After several days of reexamining the evidence and rethinking his conclusions, the navigator concluded that something was definitely wrong with the way his instruments were making their measurements. 

No one but the navigator had any inkling that there might be anything wrong with the ship’s navigation information.  He knew, of course, that he should immediately report the problem to the captain.  The captain was, however, a strict disciplinarian and was likely to blame him for not detecting the problem sooner.  He’d also demand that he either correct the problem or find another way to make the measurements more accurately.  Unfortunately, the navigator had little training in the theory of navigation – he had “picked up” his knowledge of navigation on the job while serving in other capacities on other ships – and was adept at its mechanics, but not the science that lie behind them.  He was afraid that this lack of knowledge would make him look foolish to the crew.  As a result, our navigator decided not to inform the captain. 

As a result of his decision, the navigator always made sure he slept near a lifeboat so that if his inaccurate navigational information led to a disaster, his chances of survival would be high. Unfortunately, faulty navigational information caused the ship hit a reef that the captain believed to be many miles away.  The ship was lost, the cargo was lost, and many sailors lost their lives.  Our navigator – always being in close proximity to the lifeboats – survived the sinking and later became navigator on another ship.

Two centuries later there was a management accountant who worked for a company in which there were hundreds of stakeholders – from investors who had put their savings at risk in the company to long-time employees who invested many years of their life in the firm.  It was the job of this management accountant to make sure the company knew how it had performed, its current financial position, and the likely consequences of decisions being considered by the company’s president.  In the performance of his duties, the management accountant relied on a costing system that was believed to be a true representation of the company’s economics.  Without the effective functioning of this costing system, it would be impossible for him to provide the president with the accurate and relevant cost information he needed to make economically sound business decisions.

One day the management accountant began to suspect that the costing system on which he based the decision support information he provided to the president was calibrated incorrectly – it was not based on a valid model of the company’s economics.  If his suspicions turned out to be correct, the decision costing information he provided to the president – information on which the president based the decisions necessary to direct the company toward its strategic objectives – was inaccurate.  After several days of reexamining the evidence and rethinking his conclusions, the management accountant concluded that something was definitely wrong with the way the company’s cost system was making its measurements. 

No one but the management accountant had any inkling that there might be anything wrong with the company’s decision costing information.  He knew, of course, that he should immediately report the problem to the president.  The president, however, had a no-nonsense management style and was likely to blame him for not detecting the problem sooner.  He’d also demand that he either correct the problem or find another way to make the measurements more accurately.  Unfortunately, the management accountant had little training in the theory of management accounting – he had taken one combined cost/management accounting course in college but accumulated most of his knowledge of management accounting on the job while serving in other capacities at other companies – and was adept at its mechanics, but not the science or craft that lie behind them.  He was afraid that this lack of knowledge would make him look foolish to the rest of the management team.  As a result, our management accountant decided not to inform the president. 

As a result of his decision, the management accountant made sure he kept his network up-to-date so that if his inaccurate management accounting information led to a disaster, his chances of landing another job would be high. Unfortunately, faulty management accounting information caused the president to make inappropriate pricing, operating, investment, and other decisions that led the company into bankruptcy.  The company went out of business, the owners lost their investment, creditors incurred financial losses, and many long-time, hard working employees lost their jobs.  The management accountant, however, easily found a job at another company.

            Unfortunately, most companies in operation today are forced to base their decisions on cost information generated by costing systems that do not represent the economic realities of their business and a vast majority of management accountants do not plan on doing anything about it.  Although supported by thirty-five years of my personal observations, this statement is not based solely on my personal observations.  The 2003 Survey of Best Accounting Practices Survey, conducted by Ernst & Young and the Institute of Management Accountants, revealed that 98% of the top financial executives surveyed believed that the cost information they supplied management to support their decisions was inaccurate.  It further revealed that 80% of those financial executives did not plan on doing anything about it.  An update of the survey conducted in 2012 revealed that the situation had not changed and may have even worsened.  And in 2019, an APICS/IMA survey of senior supply chain executives indicated that decision makers in the supply chain need their cost information to be more accurate and effective.  They site three problems: 1) an overreliance on external financial reporting systems, 2) the use of outdated cost models and 3) accounting and finance’s resistance to change.

            Personally, I find it hard to believe that the motives of most management accountants are anything like those of the navigator.  Those with years of management accounting experience cannot have been oblivious to the warnings that have filled professional publications for more than three decades; yet they refuse to recognize and correct the problem.  But if their motivation is not fear of humiliation, embarrassment, or loss of their position, what could be their reason for continuing to consciously provide their management with inaccurate and misleading information?

"The Navigator and the Management Accountant" is included in the book "I May Be Wrong, But I Doubt It: How Accounting Information Undermines Profitability" by D. T. Hicks

Given by the author and published on this website in 2019

Gary Kapanowski

Certified Lean Six Sigma Master Black Belt and Certified ASQ Bronze Lean professional is cost accountant for Moeller Manufacturing, a leading aerospace part supplier, and Lean Six Sigma Master Black Belt Lecturer at Lawrence Technological University Professional Development Center

He is on the editorial board and contributing editor for the Journal of Cost Management

Gary E. Kapanowski

Cost Accountant; Export Compliance Officer

Moeller Aerospace

30100 Beck Road

Wixom, Michigan 48393

 http://www.moeller-aerospace.com

Telephone:  248-960-3999 Ext. 406 (direct)

Lean Strategy: Customer focus for generating competitive advantage

Lean is considered an operational effectiveness approach and a tool to implement corporate strategy.

Some examples include reducing the cost of work in process inventory through lead time reduction or improving the process time of customer service through time studies and balancing workloads.

A recent publication by David Collis describes the successful implementation of strategies by using lean as an operational effectiveness tool.

Lean is more than just a tool for operational improvement; it is a complete strategy that focuses on the customer and allows organizations to optimize their understanding of the customer and thus add more value than the competition.........

 The full article is available in the file attached below

Given by the author and published on this website in 2019