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Costing Best Practices
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used. If there is no ‘‘where used” listed on the report, it is likely that a part
is no longer needed. This report is most effective if bills of material are
removed from the computer system as soon as products are withdrawn
from the market; this more clearly reveals those inventory items that are no
longer needed. This approach can also be used to determine which inven-
tory is going to be obsolete, based on the anticipated withdrawal of existing
products from the market.
• Comparison to previous-year physical inventory tags. Many companies still
conduct a physical inventory at the end of their fiscal years. When this is
done, a tag is usually taped to each inventory item. Later, a member of the
accounting staff can walk through the warehouse and mark down all inven-
tory items with an inventory tag still attached to them. This is a simple visual
approach for finding old inventory.
• Acknowledged obsolete inventory still in the system. Even the best inventory
review committee will sometimes let obsolete inventory fall through the
cracks and remain in both the warehouse and the inventory database. The
accounting staff should keep track of all acknowledged obsolete inventory
and continue to notify management of those items that have not yet been
removed.

Any or all of these reports can be used to gain a knowledge of likely candi-
dates for obsolete-inventory status. This information is the mandatory first step in
the process of keeping the inventory up-to-date. Consequently, the accounting
staff plays a major role in this process.

Cost: Installation time:

9–6 IMPLEMENT ACTIVITY-BASED COSTING

The vast majority of companies only accumulate and report on costs by depart-
ment and product. The first method is tied to responsibility accounting, whereby
the costs of the specific department are tied to the performance bonus of its man-
ager. The second method assumes that the cost of overhead—mostly made up of
those departmental costs noted in the first method—is assigned to products based
on the amount of labor they accumulate. The problem with this approach is that
the two methods should be combined so that all company costs, to the greatest
extent possible, are tied to the actual cost required to produce a product. Without
this information, a company is doomed to make incorrect decisions related to the
correct pricing of products, or even if they should be continued or discontinued.
The same problem applies to determining the cost or profit associated with each
customer. Again, a company can work incorrectly to increase its business with a