HOW COST ACCOUNTING DISTORTS PRODUCT COSTS The traditional cost system that defines variable costs as varying in the short term with production will misclassify these costs as fixed. BY ROBIN COOPER ANE The cumulative effect of deci er scale production ROBERT S KAPLAN sions on product design, introdue Similarly, a differentiated pro tion, support, discontinuance, and ducer achieves competitive advan n order to make sensible deci pricing helps define a firm's strate tape by meeting specialized custom sions concerning the products ky. If the product cost information ers' needs with products whose they market, managers need to is distorted, the firm can follow an costs of differentiation are lower know what their products cost inappropriate and unprofitable than the price premiums charged Product design, new product intro strategy. For example, the low cost for special features and servicesIf duction decisions, and the amount producer often achieves competi the cost system fails to measure dif of effort expended on trying to mar. tive advantage by servicing a broad ferentiation costs properly, then ket a given product or product line range of customers. This strategy the firm might choose to compete will be influenced by the anticipat will be successful if the economies in segments that are actually ed cost and profitability of the of scale exceed the additional costs. unprofitable product Conversely, if product the diseconomies of scope caused profitability appears to crop, the by producing and servicing a more question of discontinuand will be diverse product line. If the cost sys FULL VS. VARIABLE COST raised. Product costs also can play tem does not correctly attribute the espite the importance of cost an important role in setting prices additional costs to the products information, disagreement particularly for customized prod that cause them, then the firm ucts with low sales volumes and might end up competing in seg product costs should be measured without readily available market ments where the scope-related by full or by variable cost. In a full prices costs exceed the benefits from larg cost system, fixed production costs are allocated to products so that re ported product costs measure total manufacturing costs. In a variable manufacturing costs. In a The extract above is a journal article entitled "How cost accounting distorts product costs" published by Robin Cooper and Robert S. Kaplan. As the course instructor of the course of Managerial Accounting, you discussed the issues related to cost accounting with your students. After the first class, your students raised the following questions. Required: a) Companies implements cost accounting, particularly from the perspectives of the value (supply) in improving their customer profitability. We do not agree with the statement that cost accounting distorts product costs. Discuss TWO (2) factors that result in successful delivery from the initial acquisitions of materials, labor and factor overhead to the sales of products and/or services to customers. (3 marks) b) After discussing introduction to cost accounting with your students, one of them asked you about electrical costs (utilities expenses). Explain in TWO (2) points regarding electrical costs (utilities expenses), which is an example that you gave them about factory overhead, from the perspective of cost behavior. (2 marks) c) Your students submitted a group project with the following information related to revenues and expenses for a period of three months. July August September Sales in units Sales revenue 3,000 3,750 4,500 Dh 420,000 Dh 525,000 Dh 630,000 168,000 210,000 252,000 Cost of goods sold 252,000 315,000 378,000 Gross margin Selling and administrative expenses: Shipping expense Advertising expense Salaries and commissions 50,000 56,000 44,000 70,000 107,000 70,000 125,000 9,000 70,000 143,000 9,000 Insurance expense 9,000 42,000 42,000 42,000 Depreciation expense Total selling and administrative expense Net operating income (loss) 296,000 320,000 272,000 (20,000) 19,000 58,000 Determine which expense(s) are mixed and separate each mixed expense into variable and fixed elements. (Show your workings) (2 marks)