Academic journal article International Journal of Management

The Determinants of Sophistication in Product Costing Systems: An Interview Study

Academic journal article International Journal of Management

The Determinants of Sophistication in Product Costing Systems: An Interview Study

Article excerpt

Product costing systems that include all costs in product costs have been defined as sophisticated systems in the literature. This paper examines the determinants of such sophistication in product costing systems through semi-structured interviews with 11 management accountants in Great Britain. In the interviews, each manager was asked to identify what factors cause all costs, rather than just some costs, to be included in product costing systems The results show that the inclusion of all costs sophistication is determined by whether the parent company determines the software used by the operating unit; the power of the software chosen by the operating unit; the effect of parent company specifying the importance of product costs in decision making on managements' demand for product cost information; the lack of funds available to invest in product costing systems; the lack of time available for and the cost of data collection and operating the product costing system; and the effect of having solely customized sales on the level of manufacturing technology, and the quantity of different materials and labour included in the product.

A common feature of prior research into the sophistication of product costing systems is that it has imposed a definition of product costing system sophistication in terms of the methods used to identify indirect overhead costs with product costs. This has led to research that has attempted to identify the factors influencing this type of sophistication, when measured by the number of cost pools and the number of cost drivers in the product costing system (Abernethy et al., 2001; Drury and Tayles, 2005; Al-Omiri and Drury, 2007). Research into the sophistication of product costing systems, however, has not tended to examine the possibility of alternative definitions of sophistication. Drury and Tayles (2006) mention that sophistication could cover other areas, but they do not discuss what this might entail. Although Al-Omiri and Drury (2007) refer to the inclusion of direct costs in cost objects in the context of the sophistication of the product costing system, they argue that the accuracy of direct costs is not related to sophistication. They do not consider that the sophistication of the product costing system depends on the method used to include direct costs in product costs, and that sophistication depends on the treatment of indirect costs, which, in turn, affects the accuracy of product costs.

In a recent journal article, Brierley (2008) found, after conducting interviews with management accountants, that rather than defining the sophistication of product costing systems in terms of the inclusion of indirect overhead costs in product costs, it could be defined in 16 different ways. In turn, these can be summarized into three distinct areas, namely the calculation of product costs, the use of product costs and both of these. The highlight of this result is that although the method used to identify indirect overhead costs with product costs is the most popular definition of product costing system sophistication, it was not the only definition. The second most popular definition, which is considerably more popular than the third highest ranked definition, defines sophistication as the inclusion of all costs in product costs, termed, inclusion of all costs sophistication.

This definition is different from prior research because it emphasizes the calculation of material and labour costs in product costs as well as indirect overhead costs. In this case, a sophisticated product costing system should identify the costs of producing the product by including materials, labour and overhead costs in product costs. Thus, as well as ensuring the completeness of overhead costs in product costs, the bill of materials should be complete. To record the labour costs to produce the product the product costing system should record the times that each different grade of labour has worked to produce the product for all of the various routes that the product takes through the factory. …

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