ASME Cost Accounting

Full Cost Accounting Presentation Outline
‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ What is full cost accounting? Why are we doing this? What are the advantages and disadvantages? What are the issues? What is the development process? How can you be a player? Conclusions Q&A on both Fair & Equitable Accounting and Full Cost Accounting

Full Cost Accounting Definition ‡ A model that provides details on all the costs associated with producing a product or service .

and may vary by organization ± G&A (SG&A) ± Direct ± Indirect ± Service Charges .Definitions ‡ Definitions are flexible.

) or another does not make a cost more or less ³legitimate. etc.Definitions ‡ Being in one category (direct. indirect. . overhead. which may be an indirect allocation? No.´ ± Example: Is a consulting charge more ³legitimate´ because it is a direct expense compared to a staff expense.

HR.G&A ‡ General & Administrative or ³Overhead´ ‡ Includes BOG & Governance. Executive Operations. and Centralized Marketing ‡ Is about 15% (18% allocated) of total expenses ± very low per external auditors ‡ ASME¶s current government-approved overhead rate is 43% (it uses a different formula). etc. LAN/WAN. Legal & Audit. Accounting. also very low . (and some staff) ‡ Also includes Honors & Awards.

production. telephone. postage. travel ± Sometimes includes staff ‡ Indirect ± Usually includes facilities. staff ‡ Hybrid ± Some costs may be either direct or indirect . food & beverage.Direct/Indirect ‡ Direct ± Usually vendor charges.

Example: Consulting Expense ‡ Direct ± Consultant is hired to develop specific course content or to instruct a particular course ‡ Indirect ± Consultant is engaged to evaluate a profit center. such as the slate of continuing education or conference offerings ‡ G&A ± A consultant is hired to evaluate the slate of ASME product and service offerings .

Facilities. IT. or part of overhead . Information Central.Service Charges ‡ Certain services are centralized and charged based upon usage and ³cost drivers´ (Service Charges): ± Warehouse. Marketing. Office Services. indirect. and more ± Costs are charged based upon cost drivers (ABC: Activity-Based Costing) ± Examples: ‡ Successes ‡ Failures ‡ Misunderstandings ‡ Service charges can be direct.

ASME: ± Does not allocate G&A ± Did use service charges (an Activity Based Cost accounting model) through FY 04 ± Cost accounting temporarily suspended in FY 05 to facilitate reorganization ± Leaves allocation of direct & indirect charges up to Councils .Current Cost Accounting Practices at ASME ‡ At present.

Why are we talking about this? Full Cost Accounting has been identified as a Balanced Scorecard Initiative by the Board of Governors .

Cost Accounting ‡ Advantages ± Better idea of full cost of products & services ± Prices will presumably reflect full costs ± Better management of internal costs ± Leads to good decision making ‡ Disadvantages ± Takes time away from essential duties ± More accountants ± Laden with arguable assumptions ± ³Brother-in-Law´ paradox ± Leads to bad decision making .

Developmental Issues: Balance ‡ Fairness ‡ Simplicity .

Fairness ± Allocation vs.Developmental Issues ‡ Simplicity vs. Activity-Based Costing .

Developmental Issues: Basis ‡ Allocations/Costing based upon: ± ± ± ± ± ± ± Head count Revenue Expense Floor space Usage/Cost Drivers Judgment Time sheets ‡ All have their advantages and disadvantages .

but accurate? ± Compliance requirements ± Return on investment .Developmental Issues: Time Reporting ‡ Time tracking ± Staff and/or Volunteer ± Precise.

and at the same time very inaccurate . Accuracy ‡ Precision vs.Issues: Precision vs. Accuracy ± Do not confuse precision with accuracy ± Accounting systems can be very precise.

Developmental Issues: Time Reporting ‡ Depth of Application Sector Cost Center Program Product/Service ‡ ROI ‡ Accuracy ‡ Fixed or Flexible Approach? .

not necessarily the answer.Cost Accounting Problems Cost accounting systems provide an answer. .

continuity. and control .Cost Accounting Problems Cost accounting systems provide information on cost. reliability. but usually ignore important issues such as quality.

Cost Accounting Problems People often lose the the big picture as they obsess over gaming the cost accounting system Some people spend their time trying to manage those costs over which they have the least control or which won¶t improve the organization¶s bottom line .

Cost Accounting Problems Cost accounting systems are not a substitute for strong leadership looking at the big picture .

Should the Division make the product? . The overhead charges would amount to $40/unit.Cost Accounting Dilemmas ‡ Contribution Margin Example: ± A division of a company can produce a product and sell it at a cost of $80/unit and a sales price of $100/unit.

Cost Accounting Dilemmas ‡ Intracompany pricing: ± Division A can buy a needed part more inexpensively than Division B of the same company would charge for the same part. Should Division A buy it from the outside? .

Full Cost Accounting Timeline ‡ Full cost accounting is a Balanced Scorecard initiative ‡ For FY 05 we are moving in the opposite direction temporarily to reduce confusion during the reorganization and development of the FY 06 budgets ‡ Full cost accounting model Society-wide to be developed during FY 05 for application in FY 06 ‡ Methodologies TBD ‡ New model will be applied in Fall ¶05 retroactively for FY 06 .

informal information gathering Official kickoff Full cost accounting model development First reading of model by COFI First reading of model by BOG COFI recommends model BOG approves model Model is retroactively applied for all FY 06 .Full Cost Accounting Timeline Mar 04 Jun 04 Aug 04 Fall 04 Nov 04 Nov 04 May 05 May 05 Jun 05 Sep 05 Sep 05 Oct 05 Conceptual discussion at TEC Full Cost Accounting adopted as a BSC Initiative Full cost accounting assigned to the Finance Project Task Force Groundwork.

shortsighted mistakes that will hurt the organization ‡ We will proceed with development of a full cost accounting system .Conclusions ‡ Full cost accounting has its advantages and disadvantages ‡ It will provide some answers. it can provide some insights ‡ Used improperly. but also raise more questions ‡ Used properly. it can lead to reactive.

anecdotes. how do I participate? Go to the Cost Accounting site under the CoP website @ https://cop.I¶m still interested. etc on the discussion board so everyone can share Presentations are also on the website . Please post questions. suggestions.

Fair & Sustainable Accounting and Full Cost Accounting Q&A .

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