Academic journal article Journal of Accountancy

Fine-Tune Your Costing Function

Academic journal article Journal of Accountancy

Fine-Tune Your Costing Function

Article excerpt

Cost accounting reports give a company's management feedback about the profitability of its product portfolio and the efficiency of its production processes. Unfortunately, internal departments don't always provide staff accountants with the most accurate information from which to construct their reports. Here are some steps cost accountants can take to rectify this problem.

* Audit bills of materials at regular intervals. The primary information upon which you rely when calculating the cost of a company's product is the bill for component materials, and accurate records are very important to the outcome. However, sometimes the department creating the bill-of-materials record--usually the industrial engineering staff--may not be systematic about entering it into a database. To improve accuracy, ask a third party such as the internal audit staff for regular comparisons of the bills of materials with actual product components.

* Review labor routines several times a year. When a factory assembles products in several successive departments, the labor that goes into them is said to be "routed." Company accountants rely on a labor-routing database to determine the standard amount of labor cost assigned to each product. To make sure the department or staff member responsible for updating that information does so accurately, have internal auditors review the labor routing records several times a year.

* Eliminate disproportionate overhead allocation bases. Overhead costs often are allocated to products based on the number of direct labor dollars they consume, even when those dollars constitute an ever-shrinking proportion of the items' total costs. For greater accuracy, separate total overhead into cost pools that logically relate to different functions. …

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