Are you reporting "COST SAVING" accurately ?

After working with 4 different organizations of different size and sectors, I realized that there is no common method of reporting "Cost saving". Do you agree with me ? I guess yes ! I have reported cost saving in multiple ways as per the practices followed in respective companies I worked with. It really does not matter for one company that how other companies report it out as long as the KPI drives the purchasing efficiency and hence company's bottom line. But trust me; if you have ever been a part of any purchasing review meeting along with your CFO in a boardroom, you might have experience the drama on fundamentals of the saving numbers. I bet on it. 

Saving "dollars" on material cost as reported by the purchasing head is not same as reported by the CFO. There is fundamental difference in calculation. Because one reports the cost saving achieved on "purchased goods" but the other reports it on the "consumed goods". I have seen this practice in 3 out of my 4 earlier jobs. Who is actually right here ? The purchaser says that he saved money on the purchased or receipt goods by paying less than the earlier price. But what is he missing then ? The accountant does not report it in the financial MIS. He says that the material is not consumed yet. The production is still consuming the old inventory which was purchased at higher price. 

I started believing that the accountant is making sense here. Company's objective is to make sales and make margin after considering the cost of material(goods) sold i.e. cost of materials consumed. So the margin improves only if the cost of goods sold (COGS) is lesser than earlier.

Now I've started getting confused from here on... How COGS can decide how much saving is done by a purchaser !!! Because I know that COGS is calculated differently in different companies. It all depends upon how one company valuate it's inventory i.e. FIFO, LIFO or standard average method for calculating inventory cost. The argument is very simple: if the purchasers has purchased total 50 t-shirts @100 INR/piece whose earlier unit rate was 90 INR/piece, then he saved total INR 500/ (50 XINR10). It's as simple as it should be. Now, imagine that the purchaser does the same thing in 3 different companies where different methods i.e FIFO, LIFO or Standard average is used for inventory evaluation. Then the saving of INR500/ as reported by the purchaser, will be reported differently by the accountant of 3 different companies.

Do you think, it's justified ? Why should a purchaser be punished or rewarded because of accounting practice ? Does it not make sense, to allow the purchaser to report out the saving figures based on the actual purchases in a particular month ? I may be bit biased here, but the pure purchase price variance shows the sole effect of purchaser's efficiency. It does not conflict with accounting practice, production inefficiency leading to higher inventory cost or sales inefficiency leading to higher finishing inventory etc. 

Now if you agree with my view of measuring purchasing savings as above, then I may discuss about the "right base line" to calculate the variance in my next post. 

Keep hanging on...