An Accountant, Financial Analyst, and Cost Estimator Walk Into a Bar . . .

An accountant, a financial analyst, and a cost estimator walk into a bar. They sit down on the stools at the counter.

“What would you like to order?” asks the bartender.

The accountant doesn’t answer the question but asks instead, “How much does your beer on tap cost?”

“$5 per glass,” says the bartender.

“What?” says the accountant. “Why so expensive? It was only $4 last week.”

The bartender shrugs and says, “The beer company raised their prices, so I have to charge more.”

The financial analyst says, “This is outrageous! I only budgeted $4.50 for the beer.”

The cost estimator gets up as if to leave and says, “This is crazy! The beer shouldn’t cost more than $2. The raw materials are only $0.50. The process to make the beer is only about $0.50, also. So, even with 100% markup, it can’t be more than $2 per beer.”

The bartender stares at them for a moment, then says, “So, do you guys want the beer or not?”

“Yes, please,” they all say in unison.

This joke (which is not the greatest since I had to write it myself because there are no jokes about costing as the topic of cost must be too serious) showcases the common disconnects between the view of various functions usually under the same CFO umbrella. It also shows an often complete disconnect between various cost calculations and the reality of the marketplace.

Even with the same data set, accounting, finance, and cost estimating view the cost differently and often come to different conclusions, especially when it comes to the cost of individual products.

So, who is right and who is wrong?

The answer is everyone and no one, respectively. This is because the question should be, “Is the conclusion correct for the specific purpose?”

When you ask an accountant what the cost of a specific product is, his or her answer will be based on historical results (last year or last quarter) and will have some high-level assumptions as far as how costs are distributed to products. This is because accountants are primarily concerned with reporting what costs occurred in the past and only at the company, division, or plant level. They are not necessarily concerned about the cost at the product level. On the product level, for simplicity’s sake, they may “peanut butter” or spread large buckets of cost evenly across all products regardless of whether those products incur those costs (i.e., labor cost or standard hour-based cost allocation). For accountants, it is more important to report whether their respective business unit made money and how much in a specific past time period.

On the other hand, the financial analyst is usually only concerned with forecasting business unit cost for some future time period, either next year’s budget or a 3 to 5-year forecast. They are also not usually as concerned with product-level costs and follow the same or similarly crude methods to distribute costs as accountants. Their primary challenge is often forecasting what the future might hold in terms of market headwinds and tailwinds. Unfortunately, finance forecasts are as often right as they are wrong.

Finally, the cost estimator is almost exclusively concerned with product cost. His or her focus is on estimating how much a product should cost from concept to customer quoting, to sourcing, and all the way to production and even post-production stages of the product’s life cycle. They often analyze today’s product cost but also might need to calculate what it should cost in the future. Some cost estimators are sophisticated enough to understand and incorporate changes in cost due to capacity utilization variability based on predicted or desired levels by the business unit.

However, the cost estimator is rarely concerned with business-level costs. They also often are not concerned with market pricing or even market forces that could impact the cost in the future (i.e., tariffs, logistics, etc., due to geopolitical impacts). The estimated cost is almost purely based on what the cost should be, not necessarily on what price the market is driving.

Economist John Maurice Clark stated a century ago that “…there are different kinds of problems for which we need information about costs, and that the particular information we need differs from one problem to another.” In other words, there may be different cost measurements for different purposes. There is no one version of “the truth.” Thus, in the end, although the accountant, the financial analyst, and the cost estimator might have a different view or opinion of the cost, they all pay the market price for the beer and other products. The market determines the price, not the cost.

If you would like to improve your costing knowledge further, there are many educational materials available through the Society of Product Cost Engineering and Analytics (SPCEA) and the Profitability Analytics Center of Excellence (PACE). The cost estimator’s expertise can now be certified by SPCEA (CPCE certification is available online and on-demand through its website at spcea.org), giving employers the certainty needed in their cost calculations.

Written by Chris Domanski, CPCE – author of “Cost Engineering” and “The Cost.”

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