Accounting Ver05. “Why Financial Accounting Alone Cannot Support Sound Decision-Making — The Structural Issue of Fixed Costs Embedded in Gross Margin and the Importance of a Management Accounting View
- Shigenori Tanaka
- 3月16日
- 読了時間: 4分
更新日：5月13日
Mar 16, 2026
Hello everyone.
In many companies, management discussions tend to focus on Gross Margin and SG&A. As a result, we often see the following contradictions:
SG&A is repeatedly targeted for cost reduction
Gross Margin is rarely questioned
COS (Cost of Sales) is assumed to be 100% variable
Few leaders understand that COS actually contains a significant amount of fixed costs
Under these conditions, it is impossible to correctly understand the economic reality of the business. Naturally, the quality of decision-making does not improve.
1. COS contains a large amount of fixed costs
Gross Margin is calculated as Sales minus COS, but COS includes the following:
Material costs (variable)
Outsourcing costs (variable)
Labor costs (fixed)
Depreciation (fixed)
Utilities such as electricity, gas, water (fixed)
Indirect materials and maintenance costs (fixed)
Why do fixed costs end up in COS?
■ Reason: Manufacturing costs and SG&A cannot be separated by “cost nature”
In manufacturing cost accounting, fixed costs cannot be cleanly separated into “manufacturing” and “administration/sales.”
Labor, depreciation, utilities, and other costs:
relate to manufacturing, and
relate to sales and administration
Because of this mixed nature, they cannot be classified by cost nature alone.
Therefore, companies allocate these costs using predefined rules such as:
headcount allocation
floor space allocation
work-hour allocation
machine-hour allocation
In other words:
Manufacturing costs and SG&A are not separated by cost nature, but merely allocated based on predefined rules.
As a result, part of the fixed costs is included in COS, and:
Gross Margin becomes a “mixed margin” consisting of 100% variable costs plus a portion of fixed costs.
Discussing Gross Margin without understanding this structure will never lead to correct decisions.
2. A practical explanation of variable and fixed costs
To help management intuitively understand the structure, it can be summarized as follows:
■ Variable Costs (Direct Costs)
Costs that increase or decrease in proportion to volume Examples: material costs, outsourced processing, logistics per product
■ Fixed Costs (Fixed Costs)
Costs that occur regardless of volume Examples: labor, depreciation, utilities, indirect materials, maintenance
3. Financial P&L vs. Management Accounting P&L
Example:
Financial Accounting | Management Accounting |
Sales 100 | Sales 100 |
COS (70) | Variable Costs (40) |
Gross Margin 30 | Contribution Margin 60 |
SG&A (15) | Fixed Costs (45) |
EBITA 15 | EBITA 15 |
EBITA is the same. The only difference is that fixed costs embedded in COS are reclassified as fixed costs in management accounting.
4. Costs shown in SG&A are only “the tip of the iceberg”
Nevertheless, many HQs issue instructions such as:
“Reduce SG&A communication costs.”
“Cut SG&A travel expenses.”
“Reduce SG&A consumables.”
However, this reflects a major misunderstanding.
■ Costs shown in SG&A represent only the “tip of the iceberg” of total company costs.
For example, in the case of communication costs:
The communication cost shown in SG&A is only the portion allocated to SG&A. It represents only a small fraction of the company’s total communication cost.
The same applies to all cost categories:
SG&A labor cost = only a portion of total labor cost
SG&A consumables = only a portion of total consumables
SG&A utilities = only a portion of total utilities
Therefore:
SG&A figures represent “a part,” not “the whole.” Without seeing the whole, no correct decision can be made.
5. Correct decision-making requires visibility of “total fixed costs”
What management should look at is not SG&A, but:
Total Fixed Costs
Total communication cost
Total labor cost
Total consumables
Total factory overhead
Total depreciation
If these are shown in a single management accounting view, management can immediately understand where to act.
The following diagram illustrates the basic CVP (Cost–Volume–Profit) structure used in management accounting. It shows the relationship between sales, variable costs, contribution margin, fixed costs, and EBITA— and helps management intuitively understand which lever to pull to improve profitability.
This approach is far simpler and makes cost improvement decisions much easier.
Example: Calculating the break-even point
Suppose:
Sales: 100
Variable Costs: 60
Contribution Margin: 40
Fixed Costs: 45
EBITA: –5
ð Break-even point = 45 / (40 / 100) = 112.5
Given the current EBITA loss of –5, the options are:
Increase sales to above 112.5
Reduce variable costs by 12.5
Reduce fixed costs by 12.5
Suppose Option 1 is considered difficult due to market conditions. Likewise, Option 2 is deemed unrealistic under high inflation. Therefore, Option 3 is the only feasible lever.
Then the questions become:
Which fixed costs are the largest burden?
Which fixed costs are reducible?
How much reduction is needed to lower the break-even point?
Management accounting enables this level of decision-making.
6. Who creates the management accounting view?
In most local subsidiaries:
There is no FP&A
Even if “business planning” exists, they do not understand the source of numbers
Ultimately, only accounting can produce numbers
But if accounting is asked to build management accounting in Excel, they will collapse under the workload.
7. Solution: Use accounting systems that automatically generate management accounting views
Most accounting systems already have:
automatic allocation of fixed costs
automatic variable cost / contribution margin / fixed cost views
profitability analysis by product or business line
This enables:
no additional workload for accounting
automatic generation of management accounting views
management can make decisions based on Contribution Margin and Fixed Costs
A true win–win–win.
Therefore:
HQ Finance should provide local subsidiaries with systems that can generate management accounting views without additional burden.
Conclusion
Financial accounting (Gross Margin / SG&A) cannot support sound management decisions
Fixed costs embedded in COS make GM structurally unsuitable for decision-making
SG&A costs are only the “tip of the iceberg”
Correct decisions require a management accounting view based on CVP
HQ must provide systems that enable local subsidiaries to generate these views automatically
For manufacturers seeking clear financial visibility, stronger decision-making, and reliable PMI execution, Metric Japan provides hands-on support grounded in practical, real-world operational experience.
Contact us: https://www.metricjapan.com
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