“I am totally fed up with the way things are working!” shouted the irate officer of a XYZ dept.” I am telling my guys to be able to be within budget, not to have too much of work sitting on the desk for ever and have the paperwork finished before the audits.” The officer continued complaining about how he is disappointed that utility bills are soaring high and copy machine and stationary expenses are not even being counted, he went on grumbling about the take it easy attitude of the office staff and literally was bashing up everyone in the department for the expenses being incurred.
What struck me was that the accounting department was not doing its share of work in a systematized manner, or should I say systematised! ;) Even though the ABC company was their client, and they had to sub contract their job to Does It Better company because the kind of work the ABC company required was offered by the DIB company technicians, XYZ ended up paying more bills to DIB than what it charged ABC.
ABC needed assembling of some ten units of machinery for its plant. These machines were subcontracted to DIB, because they had workforce that can contribute to an early completion of the project. XYZ, without estimating the time it may need to charge ABC, offered a very penetrating price at a high bargain, and was attracting clients. The problem was that its clientele had to be catered by subcontracting to the nearby small businesses that were operating on a contract basis and were not offering free service, of course, naturally. The raw material the sub contractors got was sometimes bought in wholesale to cut the cost, for any typical assemblage of parts. However for specialized products, they would even go an extra mile and get it from a different sub contractor who had the required material and would then assemble it. It had to pay for its cost, its labor and mark up to cover other general and administrative expenses. So the budget was hiked, because they did not anticipate a totally unique machine part that was not bought in bulk and they had to.
XYZ Company dealt with several such clients and their subcontractors, as it was the parent company in utilizing the manpower that was around the neighborhood where productivity could be organized. They were not technical people per se, but had plants in the network, that can offer services, and have the products delivered to the clients fulfilling their requirements. It also paid for all the stationery, copying and printing charges to document each client and had accounts department oversee their progress. XYZ in turn was billed for the services it subcontracted where the over heads were very high.
What XYZ should have done was ask for an itemized bill for each activity, how much time was spent in assembling the parts required for ABC and all the rest of the companies individually and itemize them accordingly for each and every company it subcontracted so it would not end up in paying utility bills, stationery and office expenses for others. If ABC project took 10 man hours plus, 10 hours of utility bills it had to be divided accordingly. Also all projects cannot have same billings. If project A2B is different but DIB is charging XYZ a bill for each of the company’s requests in one single invoice and not itemize it, it is for XYZ to determine the costs based on accounting of individual tasks and not just let the employees sleep over the paperwork unfinished. True it involves a team of experts to handle the bills, and the expenses it incurs in paying for the team members also has to be distributed equally to all the clients, individually based on the amount of time it spends for each client. It should have a list of tasks accomplished, time spent by each responsible person who was part of that team and their pay rates and all the expenses covering the manpower, utilities and office expenses should be based on that data.
It is the Activity Based Costing method that the XYZ Company should adopt, instead of some vague number to buy quick clients and end up in losses. This allocation of costs is based on services and costs based on what was contributed in the projects. Want to learn more? Why not join my alma mater and register for Finance classes and accounting classes along with management and marketing? It is not bureaucracy it is meritocracy! Happy MBA!
