Does your cost system need to be precise? Probably not.
Does it need to be accurate. Yes!
What’s the difference? The four pictures above begin to provide an answer.
Accurate costs are random but near the target. For example, I have a refrigerator with a thermostat that keeps it a constant 38.0F. I test it with a dollar store thermometer 10 times. The temp readings range from 37F to 39F. Therefore, my inexpensive measurement system is accurate …close to the 38.0F target … but lacks precision.
Precise costs are repeatable but not necessarily accurate. Using the refrigerator example, an expensive scientific thermometer would have decimals and register precisely the exact same temperature during each of the 10 tests. The precise measure might be 36.05F after each of the 10 measurements or it could be precisely 38.05F each time. How could an expensive measurement system be consistently different? Not calibrating the measurement system before use is commonly the root cause.
Precise implies accurate but that assumption is wrong. Precise systems are more expensive than accurate systems but often not what we need.
You may be thinking “Why should I care?”
Short answer is “To have a profitable business, you’ve got to match the accuracy of your cost system to your type of business“.
Select the situation that best describe your business:
Barometric pressure is precisely useless information. It’s precise because it has two decimal points, e.g., 28.35. But to me it’s not accurate because I don’t know what the number implies, what I should do or what I should expect.
If your choice of cost system has your head spinning like barometric pressure does to me, give me a shout. I’ll help you match your needs to the best costing method.