Energy and Utilities Cost Accounting - Part 2

Submitted by Thiago Turchetti Maia on Thu, 03/23/2017 - 16:43
Energy and Utilities Cost Accounting

In the first part of this article we discussed how good cost accounting can create value when done right, and also some of the pitfalls related to accruing energy and utilities in continuous flows. In this second and last part, we examine costing rules, accountability dodging, and expectations on energy management systems.

Good rules are the foundation for good cost accounting. Costing rules determine how the continuous consumption of energy and utilities, ideally measured by a network of meters, will translate into accounting transactions in cost centers. As with most things in management, good rules contribute to accountability, accuracy, and transparency, whereas bad rules do just the opposite. Good rules will try to employ direct costing as much as possible, creating a direct association between the consumption measured by meters in specific parts of the operation to the values registered in their corresponding cost centers.

Coming up with a good set of rules will therefore depend upon the infrastructure available. If there are not enough meters, more costs will be indirectly, instead of directly, accrued. Whether indirect costs should be distributed to units that also accrue direct costs or accounted for separately is cause for much debate. The choice often depends upon particular accounting preferences - and politics - within each company. Few would argue, though, that indirectly distributing direct costs due to lack of measurement infrastructure is far from good practice, and we find it only too often in businesses of all natures.

Cost accountability also suffers whenever the measurement infrastructure is lacking or when obscure indirect rules burden a manager's cost center. In fact, not being in total control of her cost center is one of the most common excuses managers use to avoid the responsibility for lowering consumption, even when the criteria for cost distribution are clear. It is yet another facet of the conflict between individual and collective behavior in the business world. When good or bad behavior is directly translated into numeric scores, it becomes easier for the corporation to enforce directives and harder for managers to dodge accountability.

Having the proper infrastructure as well as the corporate accountability framework in place are definitely good starting points to create value through a good costing discipline. The road does not end there, however. Fixed costing rules must be reviewed periodically, capturing changes in the business that may very easily compromise the much-desired accountability of costs. In some cases, dynamic costing rules may be used to correctly map different ways to run the operation or fluctuations in equipment utilization. In addition, special cost centers may be created to emphasize losses and inefficiencies, helping the company convey the message. There is nothing more eye-catching to upper management than seeing a large number under a "waste & losses" or "non-productive consumption" label.

Energy management systems can help tremendously in the costing discipline. Firstly, they usually automate a number of tedious tasks required to manually accrue energy and utilities costs. These include cleaning up measurements, calculating costs from rules, and returning results back to the organization through corporate accounting systems and managerial reports. Secondly, and perhaps most importantly, they get rid of guesswork, errors, and adaptations that often plague the discipline. As a result, not only does productivity increase, but so do transparency, reliability, and ultimately, accountability.

The Viridis platform manages the whole cost accounting discipline, from meters to uploaded transactions in ERP systems. It supports direct and indirect costing rules from multiple sources, and provides managers with cost tracking resources to further enhance transparency and accountability.

CEO, Viridis

Viridis founding partner with 20 years of experience in leading high-technology companies focused on international markets. Career includes innovation and technology projects in the United States, Europe, and Latin America. He holds a PhD and an MSc in Electrical Engineering from UFMG, a BSc in Computer Science, and an MBA in Finance. He has conducted research projects and academic collaboration in applications of artificial intelligence to industrial problems. He currently serves as chairman at Fumsoft – Minas Gerais Software Society, of which he is a former president.

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