Financials

Human Error in Cost Accounting: The Facts are These

cost accounting

Benjamin Franklin once famously said, “An ounce of prevention is worth a pound of cure”. Chances are, we have all quoted this saying at some point in our life, or had someone quote it to us—usually after making a less-than-brilliant mistake. Whoops.

cost accountingvalue of prevention, we must first understand the quantifiable cost of errors. But how do we measure that, let alone understand what that means for all of us in the working world?

How Human Error in Data Reporting is Rampant, yet Measureable

While it is notoriously difficult to get accurate data on the true cost of human error, there have been some valiant attempts to do so. In this article written by David M. Smith, PHD for Pepperdine University entitled “The Cost of Data Loss“, Smith details the difficulties in accurately estimating the true cost of human error, not the least of which is the wide range of actual, measurable loss suffered. For example, while data loss due to human error may be common, often the actual loss is limited to a few minutes or couple of hours of lost work.

In spite of these challenges, after researching insurance claims and data recovery statistics, Dr. Smith estimates that data loss is second only to hardware failure as the leading cause of, well, loss.

“Added together, the costs due to technical services, lost productivity, and the value of lost data bring the expected cost for each data loss incident to $3,957,” writes Dr. Smith. “When information on data loss episodes is mapped along with the cost data, an estimate of aggregate data loss may be obtained. This calculation…estimates that annual data losses to PCs cost US businesses $18.2 billion. This estimate represents an increase from a 1999 study that estimated the annual cost of lost data to be $11.8 billion.”

How about these statistics: according to a recent study by PricewaterhouseCoopers, “which reviewed 10,640 projects from 200 companies in 30 countries and across various industries, found that only 2.5% of the companies successfully completed 100% of their projects.”

Gartner also released their findings from a McKinsey Quarterly report, detailing that, “Large projects not only fail more often they deliver less. …half of IT projects with budgets of over $15 million dollars run 45% over budget, are 7% behind schedule and deliver 56% less functionality than predicted.  That means that…at least half the time — achieving at least $15 million in benefits, requires spending $59 million”.

But in more laymen’s terms, what are the biggest ways in which the effects of failure are felt throughout an organization?

We Respond Really (no, really) Well to Positive Reinforcement

It’s all about behavioral economics. According to Wikipedia, behavioral economics is a, “study [of] the effects of psychological, social, cognitive, and emotional factors on the economic decisions of individuals and institutions and the consequences for market prices, returns, and the resource allocation… primarily concerned with the bounds of rationality of economic agents.”

Recently, Gallup reported that, “According to our analysis, companies that apply the principles of behavioral economics outperform their peers by 85% in sales growth and more than 25% in gross margin.”

Now take a look at that data and think about how that can apply at the C-level. According to this article from Bufferapp, highly successful people still won’t admit to defeat when they’re staring at the spilled milk on a short or long-term project. But how does positivity have anything to do with project failure?

“After succeeding at a task, the positive reinforcement makes us more likely to be more generous and helpful to others. If we fail at a task first, however, we’re less likely to want to help others, and less generous with our time and money.”

Essentially, project success can help create a better, more positive team environment to work in, and directly impact the economic outlook on a company-wide level.

The Solution as it Stands

So let’s take a look at how to lessen the impacts of project failure in the workplace. One of the most effective ways to help reduce human error in, say, cost accounting is to reduce the role humans play in end product. For example, modern accounting systems offer a degree of automation that can greatly reduce the likelihood and frequency of human error. But to what extent? There are actually several ways an automated system achieves this.

  • Single entry – An automated system helps reduce project failure risk by automatically populating the system with the correct data, taking a single entry and duplicating it wherever else it needs to be recorded.
  • Legibility – As Gary Hadler B.Ec, Dip.Ed, MBA, writes, “the onscreen and printed data should always be legible and so will avoid errors caused by poor figures.” While this may seem like a small point, it’s usually the small points that cause the biggest issues when missed.
  • Reports – Being able to automatically generate and analyze reports can be an invaluable asset in minimizing human error, as potential errors can be caught much sooner, often before they become costly.

Without a doubt, human error can have disastrous consequences in cost accounting and project success. By taking advantage of automated accounting software, however, you can use “an ounce of prevention” to avoid being another statistic.

Category: Financials

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Curt Finch About the Author: Curt Finch

Curt Finch is the CEO of Journyx. Journyx strives to be relentlessly creative and to build tools that help you spend your time on things that matter. After all, time is all we have. Founded in 1996, Journyx offers customers two solutions to …

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