About 10 years ago, my very young wife had the opinion that the employees of Accenture belong to one of two groups: the tech geeks and the boring nerds. Little could she guess that one day she would be married to one of those and that she would actually work there. And be happy with both, at least so I'm lead to believe...
In the last class we were roaming about cost allocation, specifically about how overhead costs (say rent, electricity, corporate jets,...) could be allocated to specific products. One very simple way could be to divide the cost equally among all the products. So if the overhead is, say €1M and the company produces 500K of products then we would allocate 2€ overhead for each product that goes out of the factory.
You can easily reach the conclusion that this division is not really fair because maybe the company, for example General Electric, produces both large scale industrial equipments and toasters and the proportion of overhead used in the production of each is different. When this is the case how should the allocation be carried out?
There are various methods but the innovation focus enterprise will choose to allocate overhead costs based on the man hours required to produce the product. And this simple decision is likely to do more for innovation and efficiency than any clever idea put on powerpoint by some hot shot consultant. To see how, follow the role play described ahead.
"role play"
You have just been promoted to product manager of toasters in General Electric with P&L responsibility. As you review the profitability numbers of toasters you realize that they are much worse than your coffee machine pal Joe, the product manager for large scale industrial equipments. You quickly realize that the reason for that is that each of your 20€ toasters get 10€ of overhead costs the same as Joe's €1M large scale industrial equipment. This is because Joe's highly efficient and automated process uses the same labour hours as your manual intensive toaster production process. Hence, the same overhead allocation.
Naturally, your first reaction is to summon up a long list of very rational arguments about why Joe's big machine should take more overhead than your small toaster and you present them to Jack Welch on the first opportunity.
As Jack tells you "tough luck bro, just eat it!" you realize that the only way you can improve your numbers and collect the hefty bonus at the end of the year is to make your process more automated and efficient. So you go back to your corner office and start working on innovation!
end of "role play"
I leave you with some food for thought: if the European politicians had attended Luis Fernandez-Revuelta Perez's cost accounting course at IE, would budget deficits be as high as they are?
