TABLE OF CONTENTS If a coin has two sides, then the IIS4002 standard is the other side of the accounting industry's standards. Whereas the accounting industry expertly measures financial transactions, IIS4002 expertly measures activities that generate intangible costs. Today, organizations require an accounting analysis and an IIS4002 analysis to determine the true costs and true benefits associated with managing operations.
An organization with knowledge of only one or the other type of costs has only a part of the picture. Today, executives need to have access to both sides of the coin. For corporate governance issues, managers and executives need to understand tangible and intangible costs. Without both sides of the costing picture, executives can potentially make decisions that could adversely affect the profitability and performance of their organization.
Traditionally people have applied the lowest tangible cost rule to determine the value of activities. This rule states:
The choice between two competing alternatives is typically made by selecting the alternative (1) with the lowest tangible cost, and/or (2) that generates the lowest ongoing financial costs. (IIS4002.L5)
This old rule can lead people to make incorrect decisions. Decisions based on the lowest tangible cost rule ignore the fact that activities have numerous cost components (not just one). These components include knowledge costs, relationship costs, emotional costs and time costs. The solution to the lowest tangible cost rule is to use the lowest total real cost rule. The lowest total real cost rule assists...
