📬 Margin cosplay: Who's touching your BOMs?

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💭 If you’ve got an awkward CFO-sized problem in your day job, and you want my help… send me your questions, and you might just see yourself in next week’s Mailbag. Submit anonymously using the button below:

Lots of fun stuff on tap today... here’s what’s up:

Now, let’s get into it.

MfgFinanceProblems from USA

I work for a manufacturing company where we have 250,000 part number/plant combinations, and we perform a quarterly global cost roll.

Currently, routers/BOMs get updated locally without any workflow approvals. I'd like to establish stronger standard cost governance. The goal is to be proactive rather than reactive during cost rolls so we know exactly what is changing and why before the official roll. How would you approach this?

Careful here, you are going to make an old CFO very excited with a question like that.

Standard costing is incredibly powerful for finance, and critical in manufacturing, where there are so many moving parts: raw material prices, yields, wastage, labor variances, downtime, run lengths, overhead treatment, and routing assumptions. Then multiply that across a large SKU base and suddenly understanding margin becomes a full-contact sport.

Standard costing gives you a fixed frame to analyze margin around. I wrote a whole piece on how it works here.

So, with the scene set, let’s tackle your question.

The problem you have is that standard costing is not really standard costing if anyone can update the underlying standards at any time, with no approval, no explanation, and no visibility of the impact until the cost roll happens.

The second problem is scale. 250,000 part number/plant combinations is not a governance exercise you can solve with brute force. That is a massive data and capacity problem.

The third problem is volatility. Manufacturing has had plenty of it recently: commodities, freight, supply chains, inflation, labor, energy. So, the argument for updating standards more frequently has grown. The alternative is accepting large purchase price, usage, and rate variances, then trying to explain margin after the horse has already escaped the factory.

I would approach this with a materiality lens.

You need an annual cycle defining how you rollover standard costs, tied to the budget process. But you also need a tiered approach, because trying to centrally approve every movement across 250k combinations is not possible. It has to be approached in batches or buckets.

Here’s one approach that could work. Put each item into one of three buckets:

That way, if something matters, it sits in bucket one or two. If it does not matter, it gets a process, but not a committee.

The other piece is workflow.

You need clear rules for when Bills Of Materials, routings, and standards can be changed, who can change them, who approves them, and what impact analysis is required. Not every change needs central approval, but every change should have ownership, timestamp, reason code, and estimated cost impact.

That is how you move from reactive to proactive.

When you rollover a cost you are accepting a movement as a permanent shift / trend rather than a temporary or performance variance. So you do need control around how this happens. It is a permanent acceptance of margin shift (for good or bad).

So… you need to be able to answer:

The problem with your current structure is that it undermines the point of standard costing in the first place. The standard is supposed to be the fixed reference point. If the reference point can move casually in the background, without governance, then your variance analysis is built on a shifting base.

So, I would not try to approve everything centrally. That will fail. I would build a tiered governance model based on materiality, define the workflow rules, and make sure every meaningful change is visible as part of the cost rollover.

TLDR: Govern the material standards tightly, process the long tail lightly, and stop invisible BOM changes from clouding your margin story.

Bruce from USA

I work at a multinational where labor cost is more than 50% of total OpEx, and I oversee a perimeter of more than 10 countries, as a Controller. The HR function has a Group HR Controlling team that won't take ownership of its full perimeter.

I wanted to break down labor cost into fixed, variable, and residual components (insurance, taxes). But the monthly commentary is a recurring issue: Group HR Controlling only comments on the main country, and even that isn't particularly insightful (e.g., generic references to phasing or perimeter deltas).

On top of this, the Chart of Accounts isn't harmonized, no governance ensures a given account is used consistently across countries. As a result, a value-added labor cost analysis is almost impossible. When I raised this with Group HR Controlling, they refused to revisit it and escalated to the Head of HR instead. My manager says it's a dead end, and I'm not sure how to move forward.

While I'm at it, would a playbook on labor cost and advertising cost be possible? That would be extremely valuable.

Thank you so much for your work, you're a real source of inspiration.

Thanks for your question and kind comments Bruce, but honestly I don’t know where to start with this…

I could go on a long rant about what good HR looks like, and how HR teams often spend 90% of their time working on the wrong things. But I’ll spare you that, largely because I am trying (and mostly failing) to become a better person.

My biggest question is this: why are you so dependent on an HR controlling function to solve this?

HR is very rarely the right place to answer commercial questions about labor cost. They should help with headcount data, compensation structures, hiring plans, attrition, policies, benefits, and employee-related facts. But the real driver of labor cost is not HR. It is how labor is demanded and used inside the operation.

Take a simple example. Let’s say the plan was to sell 1,000 units, make 1,000 units, and use 100 people in a given period. Then you actually use 110 people.

Is that good or bad?

You cannot answer that from the labor cost line alone. If you used 110 people and made 1,300 units, that may be a good result. If you used 110 people and made 900 units, that is probably a disaster. But if you made 1,300 units but only sold 800, congratulations, you may have just created a working capital problem.

The answer is operational.

That is why I think the accountability is in the wrong place. You are asking what is often the least commercial function in the business to answer one of the most commercial questions in the business: how does labor scale with volume, mix, productivity, efficiency, and business activity?

To be clear, I am not saying HR is useless. Not at all. But this is not their lane. This is finance and operations territory.

So, I would stop trying to make HR Controlling own the whole answer. They clearly do not want it, and from your description, I don’t see how they could be placed to answer.

Instead, I would change the dimension of the analysis. Do not try to build one horizontal labor cost commentary across the whole P&L and all countries, dependent on HR giving you perfect inputs. Build the commentary country by country, or business unit by business unit, through the operating P&L.

For each country, I would want a simple bridge: headcount, rate, productivity, volume, mix, statutory costs, benefits, FX, and one-off items. You may still need HR data for some of that. Fine. But HR becomes an input provider, not the owner of the commercial explanation.

The Chart of Accounts issue is real, by the way. If accounts are not harmonized across countries, your global labor cost analysis will always be a bit of a swamp. You need a mapping layer at minimum, and proper governance eventually. Otherwise people will keep coding similar costs differently, then everyone will act surprised when the analysis looks like it was assembled during a fire drill.

But again, I would not wait for a perfect global COA harmonization project before doing anything useful. Start with the biggest countries. Build a clean labor cost bridge for those. Show what good looks like… then use that to force the conversation on account mapping and ownership.

As for your boss saying there is no way out, and HR escalating to the Head of HR, I’ll be honest: this is the sort of bureaucratic horseshit I am allergic to. So I don’t know what to say other than it sounds like very poor leadership.

Finance should not be sitting there helplessly waiting for HR to bless the labor cost commentary. Labor is over 50% of your OpEx. That makes it a finance issue, an operational issue, and a business performance issue. Finance should be grabbing hold of it and telling the business what is needed, not waiting for a support function to decide whether it fancies helping this month.

My practical answer is this: take ownership of the analysis, but not ownership of every input. Build the country-level bridges. Use HR where they are useful. Use operations where the real driver explanation sits. Create a mapping layer for the messy COA. Then escalate the real issue, which is not “HR will not comment properly.” It is “we do not have reliable labor cost governance for more than half our OpEx.”

And if there really is no way through all of this, go find somewhere to work more deserving of your talents.

And yes, labor cost and advertising cost would both make great playbooks. They are two of the most abused lines in the P&L. Plenty of bodies buried in both.

TLDR: HR will never give you a full commentary on your labor cost. You are asking a fish to climb a tree. You need to attack the problem differently.

Carl Can’t Close from USA

I'm taking over my second CFO role, and I've found out three days before I start that the controller resigned (because she didn't get the job). I'm knowledgeable about accounting but have never been a controller. How do I manage this? It's a $100–$150m company.

Hey Carl.

The short answer is simple: find a new controller.

But not in a panic.

You need to run a proper process, internally and externally, to find a controller who can carry you through the next few years. At a $100m to $150m company, this is serious role, and you need the right person to build your team around.

So, the real question is what you do in the meantime, while you are recruiting.

First, calm everyone down. The controller leaving three days before you start is annoying, but it is not a meteor strike. Companies survive worse every day. But your new team will be unsettled, and you need to make it boring quickly.

Second, understand the team underneath your controller. At that scale, your controller cannot have been a one-woman band. There must be people below her. How strong are they? Who owns close? Who understands revenue, inventory etc?

Understand what your controller was doing versus what they were reviewing. This will help inform what you need next.

Find the strongest person in that team and see whether they can step up temporarily.

Third, speak to the outgoing controller if you can. She may not have much loyalty to you, and she may not be feeling especially warm and fuzzy about the company. But she may still care about her team, her work, and her professional reputation. Offer to buy her dinner. Ask where the bodies are buried. Ask who is strong. Ask what can break. Ask what she would fix first if she were staying.

Forth, buy yourself time. If there is no obvious internal interim option, I would bring in an experienced temporary controller for three months. Ideally someone who knows your systems, your industry, or at least the broad accounting complexity of the business. You are hiring them to keep the machine running while you find the right permanent person, not be a hero

Also, be alive to the politics. The controller resigned because she did not get the CFO job. That means there may be some bruised feelings in the finance team. Some people may have backed her. Some may now be nervous. Some may be waiting to see whether you come in swinging your wotsit around.

Come in calm, respectful, and direct. “I know this creates uncertainty. My priority is continuity first, then building the right team for the next stage.” 

Good luck with the new role. Slightly spicy start, but you’ll be fine.

TLDR: Don’t panic-hire. Stabilize the team, buy interim cover, and take your time finding the right controller.

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Let me know what you thought of today’s Mailbag. Just hit reply… I read every message.

Last weekend’s Playbook launched a new series on building the right FP&A function for your business.

Disclaimer: I am not your accountant, tax advisor, lawyer, CFO, director, or friend. Well, maybe I’m your friend, but I am not any of those other things. Everything I publish represents my opinions only, not advice. Running the finances for a company is serious business, and you should take the proper advice you need