An Examination of the Costing Process in a Technology Centre: Lessons for Management
Brierley, John A., International Journal of Management
This paper reports the results of a study of the costing procedures in a technology (or research centre) of a multinational UK company operating in the metalworking industry. Research contracts carried out within the company or in conjunction with other European engineering companies are priced at full cost, and contracts carried out for third parties are priced on a cost-plus basis. Budgets are prepared for all contracts and costs are reviewed for all contracts to ensure that they are within budget. The majority of the centre's costs are direct labour, hence satisfaction with the accuracy of research contract costs is dependent on ensuring that the labour cost of each contract is recorded correctly. Other than pricing contracts, cost information is rarely used in decision making. Decisions are based on research/technical information rather than cost information.
This paper reports the results of a study of the costing procedures in a technology (or research) centre of Theta plc (the company's name has been changed to preserve confidentiality), a multinational UK company operating in the metalworking industry. The technology centres undertake research contracts for manufacturing units within Theta plc and for other external companies. Two of the technology centres are located in Northern England and the other in South Wales. In total, they employ 800 people, employing 365,235 and 200 in the three centres. The largest centre is the subject of the research and is divided into 25 knowledge groups (or departments) that are customer focused having names like construction applications, packaging applications and transport applications.
The objective of the research is to describe the research contracts and costing procedures used in one of the company's three technology centres. The data for the study comes primarily from a questionnaire completed by and an interview with the management accountant at one of the technology centres. The remainder of the paper is organised in the following way the next section describes the types of research contracts undertaken by the technology centre, how they are priced and the use of profitability maps. This is followed by a description of the costing system and the final section concludes the paper.
The objective of a research contract is to produce knowledge. This could be in the form of producing software, a report concerned with solving a problem or a computer program for managing a production process. There are three different types of research contract. (1) the Annual Operating Plan (AOP) contracts relate to work undertaken within Theta, (2) European Union (EU) contracts (the contracts name has been changed to preserve confidentiality) relate to work undertaken from a European perspective for the European Union and (3) contracts carried out for third parties. The EU contracts set out precise criteria relating to the research to be undertaken and the duration of the contract. They are invoiced annually and shown as an asset in the balance sheet with revenue from the contract being credited periodically to the profit and loss account. AOP contracts are invoiced quarterly and tend to be more open ended. This arises, for example, when there may be a request to carry out 20 research years of effort on a particular issue, but it is possible that the technology centre carries out 25 research years of effort to complete the contract and receives revenue for only 20 years worth of work.
AOP and EU contracts are priced at full cost defined as materials, direct labour and some overheads incurred over the life of the contract. AOP contracts are priced at full cost because they are regarded as a service to Theta through helping to solve technical problems, provide a better product to the customer and improve the production process. EU contracts are priced at full cost, without any profit margin added to the cost, because their aim is to bring together European engineering companies to enhance their commercial viability rather than making a profit. …