In the aftermath of World War II, Ford Motor Company stood on the brink of collapse. Once the embodiment of industrial innovation under Henry Ford, the company had drifted into administrative chaos by the mid-1940s. Leadership instability, outdated practices, and a lack of financial discipline left Ford hemorrhaging money, losing tens of millions of dollars without having the accounting systems to understand why.
In product development, up to 80 percent of the subsequent costs are already determined in the design phase. Nevertheless, cost evaluation often takes place shortly before series production begins – too late to take countermeasures. The consequences are costly adjustments, additional costs, and decisions based on uncertain data.
Many cost engineers don’t start their careers on a factory floor. They start with spreadsheets, drawings, cycle times on paper, and assumptions that everything runs the way it is theoretically supposed to. In many cases, that works… right up until it doesn’t. That’s where OEE comes in.
It’s important to distinguish between measurements made from the financial accounting perspective and those made from the managerial accounting perspective. Periodicity is important in financial accounting. Expenses are measurements of the resources consumed during a specific period of time using measurable and auditable historical information in compliance with man-made rules and regulations. Managerial accounting, on the other hand, is more concerned with the long-term, sustainable economics of an organization. Expenses are measurements of the resources that need to be consumed for the organization to sustain its business over the long-term, whether or not those resources are consumed during a specific period of time.
September is here — and let’s be honest, we’re all feeling a little of the back-to-school blues. The long days of summer are winding down, vacations are over, and routines are back in full swing. But instead of sinking into post-summer sadness, let’s lighten the mood together.
During my four decades as a consultant, it has never ceased to amaze me how little attention manufacturing firms pay to the amount of time they use the equipment they’ve invested in to generate a return on that investment. The equipment uptime needed to drive their cost models is seldom available and must be somehow be estimated. Although they see their equipment as an available and valuable resource, they don’t appear to treat it as an investment. They fail to grasp to economic impact of idle equipment and how that relates to their return on investment (ROI).
I had some time to reflect and do a bit of research on key trends over the holiday.
Artificial intelligence is already reshaping the cost engineering profession, and its impact in the workplace is undeniable. Manual, repetitive, rule-based costing work is rapidly being automated. If your job consists of little more than generating should-cost estimates, then you are at risk because that part of the job is going away.
As the demand for cost engineers continues to grow, understanding the academic backgrounds that hiring managers seek has become increasingly important. In a recent survey conducted by SPCEA, we explored the educational qualifications preferred by employers when hiring cost engineers. The results offer valuable insights into the qualifications that are most valued in this profession.
Cost engineering, a critical aspect of organizational efficiency, manifests itself differently across companies and industries. To delve deeper into this dynamic, SPCEA recently conducted a survey on LinkedIn, aiming to understand where exactly the cost engineering function resides within different organizational structures. The results and associated feedback shed light on some intriguing rationales:
Knowledge is power, but how would you know whether more or new knowledge is needed? What if you were convinced that the knowledge you had was, in fact, the best and only knowledge you needed? Would you refuse to seek new knowledge and resist its merits? Based on human history, the answer is probably yes. As much as human civilization has advanced in the last several thousand years, change has always been resisted with fervor. From the advent of cars over horse buggies to the recent advent of AI, most people have always preferred to stay within their comfort zone of well-established social and technological structure. Costing has not been any different.
For those lucky enough to have had careers in the automotive industry, Long-Term Agreements (LTAs) are as common as cars themselves. Most consider them a normal part of doing business. They are meant to provide suppliers with assurances of volumes over the full life of the program in exchange for steady supply and cost reductions for the customers. It’s standard practice for the suppliers to offer customers LTAs in the form of annual price reductions (or rebates) over program life and/or an upfront lump sum payment before the start of production (SOP). The larger the price decreases or lump sum payments, the better for the customers. The supplier sales team is happy to win the business, and the customer purchasing team is happy to bring savings to their company every year. Except that none of it is real.
There is a certain innocence in numbers. Just like music, they can create a harmony that soothes the soul. Maybe that’s why some costing professionals don’t stress when performing their calculations. They put their numbers on the page, and they walk away. No harm, no foul. Their conscience is clear. Yet, numbers can cause great harm that can result in the pain and suffering of many people. How is this possible?
In earlier blogs, I explained my views about depreciation; both its irrelevance in business decision-making and the way it is treated as a fixed annual cost. An organization does, however, need to provide for the preservation of its existing capital based as it sells products and services to customers. One way to accomplish that is to develop a Capital Preservation Allowance. I first proposed this solution in an article titled “A Modest Proposal for Pricing Decisions” that appeared in the March 1993 issue of Management Accounting. This allowance is a long-term, forward-looking view of capital requirements that replaces depreciation in the calculation of product and process cost and enables a company to effectively accumulate the funding required from current products and services to preserve existing productive capabilities.
The product cost engineer plays a crucial role in ensuring efficient product design, production processes and cost-effective operations within manufacturing settings. Here are ten important skills that I think every product cost engineer should possess:
