Also see our accompanying presentation on Slideshare.
I was teaching Cost Accounting through UCR Extension, I came to realize that although most of the students had work experience, they did not know the fundamentals of manufacturing which were used to develop cost; work centers, bill of materials, and routes all unfamiliar terms. Without this knowledge they could not possibly understand how the cost was rolled-up. So in my discussion of the basics of cost terminology, I went through these concepts. Most textbooks that I have seen do not do cover this.
Textbooks always give examples of hybrid type costing methods, but unless you have some experience in operations, it probably does not make much sense, why you would use different cost methodologies together, much less a cross between the two.
Again, the texts do not separate direct costing from indirect costing. I think it is
important to differentiate the two. A standard cost system is usually seen to have one overhead cost pool, using the ‘peanut butter’ approach to overhead costing, this not always the case. Standard cost could be used for the direct portion, while ABC could be used for the indirect.
I’d like to introduce a revolutionary method of thinking, overhead allocation is only made to meet GAAP requirements, it means little in developing an accurate cost structure. Treat the direct and indirect separately, manage them separately. Come up with the simplest methodology possible to manage in your ERP system for valuing inventory, but for cost analysis, use a different approach. This is my own personal opinion based on my experience, the Society does not take sides, we support better costing.
Regardless of you approach to inventory valuation, this understanding is essential to your understanding of the total cost structure of the business. This is something usually acquired through experience, but can be taught and usually is not. The cost build is one of the key first pieces of information that you need to have.