Page 178 - Accounting Best Practices

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Chapter 9
Costing Best Practices

This chapter is concerned with those best practices impacting the cost of products
and the valuation of inventory. They are grouped into three main areas: informa-
tion accuracy, cost reports, and costing systems. The first category, information
accuracy, covers several best practices that review the accuracy of key informa-
tion driving the costing of inventory: bills of material, labor routings, and units of
measure. The second category, cost reports, is covered by the largest number of
best practices. These are concerned with modifying or even eliminating the cur-
rent cost-reporting systems in favor of a tighter focus on direct costs, materials,
costs trends, and obsolete inventory. The final category, costing systems,
addresses the two costing systems that should at least supplement, if not replace,
traditional costing systems: activity-based costing and target costing. When the
complete set of best practices advocated in this chapter has been implemented, a
company will find that it has a much better grasp of its key product costs and how
to control them.

IMPLEMENTATION ISSUES FOR COSTING BEST PRACTICES
This section covers the general level of implementation cost and duration for each
of the best practices discussed later in this chapter. Each best practice is noted in
Exhibit 9.1, along with a rating of the cost and duration of implementation for
each one. Generally speaking, these are easy best practices to install because
most of them can be completed with no other approval than the controller’s, and
they have a short implementation duration and are quite inexpensive to install
and operate. The main exceptions are target costing and activity-based costing,
which require a major commitment of time and staff and the approval of other
department managers, depending on their levels of involvement in the imple-
mentations. However, despite the level of installation difficulty for these two
best practices, they both have the most significant positive impact of all the
improvements noted in this chapter and thus are well worth the effort.
There are also several cost-reporting changes advocated in this chapter.
Though the reports are not hard to alter or replace, it can be quite another matter
to convince the report recipients that they are now receiving better information,
especially if they are old-line managers who have received the same cost reports
for decades. Consequently, the time required to insert a new cost report into a

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