Lately we are talking a lot about how in a near future the intensive introduction of technology in the workplace will result in the elimination of jobs that will be replaced by robots or various types of automation. There are many studies that differ in the degree of this impact, but according to the OECD (just to mention one), the percentage of jobs with a high risk of automation, and therefore of being eliminated, goes from 6 to 12% among the main developed countries. It is not very clear the time horizon in which this change (disruptive, they call it) will occur, although some speak of the next 10 or 20 years.
However, it does seem that the configuration of production processes as we know them today will change radically. And although it will not affect exclusively the workers with more routine type tasks, the truth is that the fist and most immediate changes will occur on what we denominate direct labor.
This substitution of man by machine is not something new. Just remember how 20 or 30 years ago the factories employed many workers in a semiautomatic production environment. However, it now seems that we are approaching a definitive replacement.
In this context, some of the cost analysis that have been carried out historically may lose their validity or must be updated. This is the case of control through standard costs, where one of the classic elements of study has been, and is, direct labor. We analyze deviations from the standard budget in terms of cost and efficiency, to know the performance of personnel directly linked to production, and implement actions, if necessary.
But in an almost fully automated environment, this analysis no longer makes sense. We will no longer be facing the production staff as a source of deviation, or if there is, it will be a smaller and probably easy to identify, which will lead to move the focus of control to other areas (raw materials, overhead …).
In short, we will see how changes in the structure of production processes will imply, at least, the adaptation of the systems of analysis and control currently in force, whose validity in the future will be conditioned by the degree of transgression of such changes.
This post does not deal with measures and tools to control the expenses and to be able to balance the accounts and meet the budgets. I’m sorry to disappoint anyone who has understood that from the title. It is more related to another post I wrote recently in which I talked about how to configure the value of stocks. It seems to me that in that article perhaps I left an implicit message that I did not intend to disseminate: that of the existence of a single and absolute cost value.
I explain myself. Firstly, the following question must be asked: What is the purpose of the cost that I am going to evaluate? Depending on the answer, you should set the costs accordingly. In this way, if we want to obtain the value of our inventories, the inputs and criteria used will be (or may be) different from those used to determine the selling price of a product, for example.
Thus, in the case of wanting to valuate the stock we have a normative guide that helps us to know what costs to charge, but they do not necessarily have to be the same ones as if we try to make a decision on the margin intended in a sales article. In the latter case, it may be interesting to consider the costs of distribution, marketing … In addition, we can consider that in one case an ABC method builds more faithfully the cost, while in the other, Full Costing model cab be the ideal one.
Besides, we must add the decisions we have to make regarding the nature of a cost (direct/indirect; fixed/variable with respect to what, product or activity; period/product …).
Recalling a well-known article by Robert Kaplan on the subject, one might ask not only whether we should perform different cost calculations for different purposes as we commented, but whether this involves having different cost systems. That is, if, on the one hand, we would have a system to obtain the costs for the purpose of valuing stocks, and, on the other hand, other systems to determine the selling price of an item, or for Operational control. And here is an interesting debate, since each of these systems require different inputs (although some are common), their frequency is different (efficiency information may be needed on a daily basis) and the applicants differ (Finance, Production, Sales …), which makes it necessary to clear the question of whether the return of all this information justifies having several cost systems which, moreover, must be reconciled. This will be nonsense, for many Finance Directors eager to have a single tool that facilitates management. But the truth is that the characteristics of the company and its operations will be the ones that require us to configure the cost systems.
As we see many decisions to make in the field of cost design.
The technique of bridges is a study tool which is a step beyond the traditional horizontal analysis. It can be said that the latter is static, as it generates a data (sometimes appears as a percentage) but provides no further information. For its part, the analysis with bridges aims not only to display a value, but also explain it. Hence, precisely its name is a bridge between two data.
This is, therefore, an examination with great potential and that requires knowledge or the investigation of the origin of variations or deviations. Not enough to generate a value, but must give the reason or cause.
Let’s take a simple example. Suppose the budget of the Sales Department of a company for the year X and the actual expenditure for that year.
First, we perform the classic analysis.
The analysis with bridges explains the variations.
As seen in the example, bridges technique gives more information and reconciles data in a simple manner. It pretends to be very visual and schematic, so that we do not need narrative explanations.
The potential of analysis with bridges is high and has the following applications, among others:
– It compares different types of settings: allows you to compare the actual data with a budget for the same period; or the actual data with several consecutive periods; or the difference between various budgets …
– It analyzes one or more data at once: we can focus on the reasons for a single value such as sales, or make it wider and jointly analyze variations on sales, gross margin and profit. This second option is very rich (and appreciated by managers) and provides at a glance the impact of the mix, volume, price, overhead …
– It is applicable to different areas: although its origin is linked to the study of financial indicators can be used to address differences in all kinds of magnitudes: departmental expenses, personnel expenses, number of employees, customer complaints …