Costs

Costs

Estimation

Generally Accepted Accounting Practice The main purpose of searching for a new method to estimate cost if due to the erroneous practices of accounting. There is a wide recognition of this problem but most companies still have not gone to a different approach. The GAAP principles do not provide the kind of cost detail and information focus required in today’s capital intensive, automated, and complex manufacturing and distribution. It generates an erroneous and inverse relationship between computed product cost and current production volume. This is the major problem- the inverse relationship between production volume and inventory value because these indirect expenses are all fully charges to the current product. In periods of declining sales, the apparent cost of the product rises, bringing suggestions of price increases in the face of weak sales performance. In good sales periods, apparent cost of product declines, suggesting either a lowering of prices or higher profits. Neither inventory valuation reflects the true cost of manufacturing the product. The typical distribution an accrual accounting practice often distorts operating cost information and performance criteria to accommodate financial policy, management practice, and current tax law requirements. Some manufacturers even overproduce to absorb overhead in the false assumption that this reduces their product cost. Many different methods have been tried to fix this inaccuracy, such as activity bases costing, machine labor costing, process costing, productive hour rate costing, life cycle costing, and technology accounting. All of these methods have common weaknesses. None of these methods isolate the definition of the cost of the product form the definition of the overall performance of the business. All of these techniques cause the apparent cost of the product to vary with volume yet manufacturing has done nothing different when volume increase or decrease. Paradigm Shift One of the major philosophical changes is the conversion of the costing base from the variables of materials, labor, and volume to the constant of time and time use of capital facilities in each operation. By allocating all indirect expenses to time use of facilities, indirect and general and administrative expense can be fully absorbed and the correct share of these costs can be precisely assigned t...

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...ined, computed, and predicted for each operation with a reasonable degree of accuracy. Indirect and overhead charges can be assigned to the costs of operation in direct and equitable proportion to their time contribution to each function or activity by applying a time use of facilities approach and a workstation use rate. With this total absorption costing method is it possible to isolate cost of individual parts, item, and operations. One can quantify the impact of methods or product design and changes. The cost impact of capital facility and data control feedback improvements can be defined by comparing standard costs accumulated in the WIP inventory record and the actual costs accumulated. One can identify and promote higher margin products and services. Differences The primary differences between the conventional method and how the use right applies indirect and period costs to the product is that the use rate applies the capital investment burden (depreciation), manufacturing burden and overhead, indirect costs, general and administrative expense to a stable predictable measurement unit (square feet and time) on a time sue of facilities, total absorption, standard costs basis.