Academic journal article Journal of Business and Educational Leadership

A Three-Way Cost Classification Model for Understanding the Supply Side of the Firm

Academic journal article Journal of Business and Educational Leadership

A Three-Way Cost Classification Model for Understanding the Supply Side of the Firm

Article excerpt


Many accounting students confuse conceptual models of empirical things and events with the things and events themselves. Accountants operate in a world of conceptual models and terms such as revenue, expense, cost, income, and dividends just to name a few. All too often students think of these concepts as something existing in the real, empirical world.

Years ago, the famous physicist, J.L. Synge, commented on the tendency of people to confuse a concept with a something. He called this confusion the Pygmalion Syndrome after the symptoms of the legendary sculptor of Cyprus who carved a statue of such surpassing realism that it came to life and he fell in love with the statue, not the goddess herself. He went on to refer to blurring the distinction between the empirical world with the conceptual world as a disease of the mind called rife. Although Synge may have originated the term Pygmalion Syndrome, the concept itself is not new. It is sometimes called reification from the Latin res meaning thing or object. To reify a concept means to speak of the concept as a physical thing or, as John C. Condon, Jr. expresses it, "To reify is to thingify." For example, accountants say over and over management is distributing dividends, distributing dividends, and distributing dividends. This phrase is said so casually and often that the listening brain thinks of the dividends as the something which is being distributed in the real world rather than the real thing, cash.

Some people may not view this problem of reifying a concept as a significant problem. It may be dismissed as simply a matter of semantics. However, reifying concepts gives rise to communication problems and often leads to faulty reasoning by those attempting to understand the accountant's language. A sharp distinction between concept and thing is of inestimable value in learning accounting as a student and understanding the accounting reports prepared by accountants for management and external users.

The authors have found that it is critically important to clarify this confusion between concept and thing when teaching cost accounting for the supply side of the firm. The purpose of this article is to present a three-way cost classification structure that has been used successfully at both the undergraduate and graduate levels to communicate effectively management accounting topics that otherwise would be slippery and amorphous for the student to grasp.

The introductory session of our managerial cost courses is devoted to explaining the difference between a concept and a something. The reminder that cost is a concept is strongly emphasized. Interestingly, when the comparison of revenue with cash is made to illustrate the difference between a concept versus a thing, the difference between the two seems to be most effectively communicated to students.

The following example is used to contrast revenue, a concept, with cash, a thing: Suppose a taxi company takes a customer to the airport and the driver says the fare is $50. From the taxi entity perspective, this transaction has dual effects on its financial position. The asset cash is increased $50 and revenue is increased $50. The concept of revenue is defined as the market value of goods or services provided to the customer. So the $50 which the driver is holding is at the same time both cash, a something, and revenue, a concept. An analogy often shared with students at that point is as follows: suppose you are given a golf club as a birthday gift. The golf club is a thing in that it has molecular properties such as length and weight. But a birthday gift, like revenue, is a concept. Giving someone something on their day of birth is called a gift. So the golf club is at the same time a club, thing, and a gift, concept.

Elaboration of how cost like revenue is a concept not a something then continues until it is perceived that this blurred distinction has been removed. As indicated earlier, an entire first session is devoted to this deterrent to learning. …

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