Accounting systems should reflect real total overhead costs and figure total costs and profits by customer.
What do these two companies have in common: a mortgage-servicing company that charges a fixed rate for every bank application, regardless of how complicated the paperwork gets; and a steel company that figures its costs per pound of production, disregarding which clients require more service?
The answer: both rely on accounting systems that fail to identify real-world costs. "Most small companies can't price to cover costs because they don't know what those are," says Bill Wiersema of Miller, Cooper & Co., a Chicago accounting firm. An accurate system should reflect real total overhead costs, as well as help explain the price of customer service by figuring total costs and profits by customer. (Some clients probably aren't worth keeping.)
For more specific tips, request reprints of the articles "Identifying Hidden Costs" (from Corporate Controller magazine) and "The ABCs of Activity-based Costing," from Wiersema at Miller, Cooper, 650 Dundee Rd., Suite 250, Northbrook, IL 60062-2759.