Overview

The costs of doing business labor, material, and overhead cannot be effectively controlled without a system that effectively monitors how costs are incurred. Specifically, suppliers should develop standard costs, track the actual costs, and regularly compare the actual costs to their standard. The common methods currently used for cost accounting were developed between 1825 and 1925. Materials, labor, and overhead were the major categories for allocating manufacturing costs.

Today's accounting systems need to account for a significant problem in cost allocations. Cost allocations are generally calculated by dividing the number of direct labor hours into the overhead expense. Failure to evaluate the actual current cost of overhead by realistically viewing "hidden" organizational costs in the product/process has led to major pricing mistakes, including overcosts, as well as undercosts of particular products in manufacturing cost accounting. These mistakes account for unprofitable product/processes being developed and account for cost overrides that destroy profitability. Direct labor in today's manufacturing product/processes often accounts for any where from an average low of 5% to a high of 25%. Upwards of 50% of today's hidden costs include:

• Documentation

• Depreciation

• Engineering changes

• Rework

• Repair

Modern manufacturing economics dictate a change in standard cost accounting. Activity based accounting provides a sound alternative. The use of ABC measures is the consequence of changes in manufacturing, sales, customer service, complaint handling, quality issues, automation, and other areas (Huthwait, 1989). These systems cost a total product by looking at the following:

• Individual parts within the product

• Operation/processes that...