Budgeting and standard costing practices in New Zealand and the United Kingdom

The findings of a survey of budgeting and standard costing practices in New Zealand (NZ) and United Kingdom (UK) manufacturers are reported. The results suggest that some commentators' predictions of a demise in standard costing and variance analysis are overstated. It has been found that standard costing systems continue to be popular and that the majority of accountants surveyed do not envisage abandonment of standard costing and variance analysis in advanced manufacturing technology environments. Comparisons between budgeting and standard costing practices used in NZ and the UK reveal a high degree of consistency. In the case of the few differences that have been observed, it appears that there is a greater lag behind prescribed practice amongst NZ manufacturers. The main differences noted are: a greater proportion of performance reports used in NZ budget centers fail to distinguish between controllable and non-controllable costs; NZ manufacturers are more reliant on historic data when setting standard costs; when distinguishing between variable and fixed costs, there is a greater tendency in NZ to simply treat direct costs as variable and overhead costs as fixed.     

Reporting of overhead variances: a cost management perspective

In this paper we argue that if cost management is the primary purpose of a costing system, as opposed to external reporting, then it is often appropriate to report overhead variances as a period cost, rather than prorating these variances to various accounts. Further, we argue that reporting variances as a period cost may be appropriate in some situations even if external reporting considerations underlie the design of the cost system. However, a review of the accounting treatment of overhead variances in major cost/managerial accounting textbooks indicates a clear preference for proration of overhead variances between product costs and period expenses, compared to reporting the entire variance as a period cost (expensing). Textbooks typically argue that proration is theoretically more correct and expensing is only acceptable where the variance is immaterial.     

Managerial Accounting Early in the British Industrial Revolution: The Carron Company,a Case Study

Traditional accounting histories date the advent of sophisticated cost accounting to the mid-1880s. Research in recent years, however, has provided evidence of purposeful cost management during the British Industrial Revolution. Given the advances in capital accumulation techniques, market structure development, and technology, it might have been expected that British entrepreneurs would have appreciated the advantages that effective costing could provide. This article is a case study of the Carron Company, the huge Scottish ironworks, whose cost accounting methods were notably innovative during the period for which plentiful archival records exist: 1759–1786. Carron's utilisation and practice of cost management is examined in the areas of expenditure control; responsibility and departmental cost management; overhead allocation; cost comparisons and transfers; costs for decision-making; budgets, forecasts, and standards; and inventory control. The positive findings in all these activity areas contribute to the growing rehabilitation of British Industrial Revolution cost accounting as a precursor of ‘the costing renaissance’ a century later.     

Custom fabric ventures: An instructional resource in job costing for the introductory managerial accounting course

Job costing is a core foundational concept in the introductory managerial accounting course. The purpose of this instructional resource (IR) is to provide a thorough hands-on, active learning resource that will allow introductory students to experience a full set of accounting and management activities necessary to produce a job and assign production costs to it. For example, the IR requires students to analyze overhead costs, determine the optimal job size, schedule production, calculate the amount of materials to purchase, complete material requisitions, update raw materials records, analyze labor time records, complete a job cost record and address critical thinking questions. The IR was developed for use in a “flipped classroom” in which students work under the guidance of the instructor, but could alternatively be assigned as an unsupervised out-of-class assignment or on-line project. Since the IR was specifically developed as a learning tool for novice introductory managerial accounting students, adequate guidance is provided throughout the activity. However, to add realism and challenge students to think beyond the confines of simple mechanics, management and accounting issues are seeded throughout. Student feedback indicates that the IR not only helps students learn how a job costing system operates, but also helps students become aware of management decisions and accounting issues that impact the costs assigned to a job.     

Activity-based costing systems and incremental costs

This article derives, in a comprehensive but informal way, the essential conditions for activity-based costing (ABC) and for costs proportional with output volume (CVO), such as variable material and component costs, to measure economic costs defined as incremental costs. Without this property these costing systems may give incorrect signals in decision making, such as in pricing, in altering the product portfolio, in make or buy and outsourcing decisions and in cost management. In contrast to the existing literature, these conditions are found to be extensive and to require a fairly detailed exploration of the complex and multifaceted nature of technology. Conditions on technology to allow the usual definition of cost pools are shown to require that production involves neither cost complementarities nor non-complementarities, that inputs in a cost pool are independent of those in other cost pools and that technology takes the form that the input mixes for a cost pool are fixed and invariant with volume. Essential conditions on the input market and the costing system are also considered. It will be indicated that a perfect market for inputs is required and that cost drivers are required to be linear homogeneous in the inputs in their cost pools. It is also shown that the type of cost function that can be entertained is restricted by those permissible technologies which allow incremental costs to be generated. These assumptions are thus imported into all the uses of these methods. Failure to satisfy these conditions suggests that many costs cannot be easily treated using ABC or CVO. Such failure also leads to distorting accounting numbers away from economic costs.     

Information asymmetry,information dissemination and the effect of regulation FD on the cost of capital

This paper considers the impact of Regulation Fair Disclosure (FD) on firms’ information environments and costs of capital. For NYSE/Amex firms we find little evidence of a change in the cost of capital attributable to Regulation FD. For Nasdaq firms we find that Regulation FD increased firms’ costs of capital by 10–19 basis points per annum though the statistical significance of this change is modest for some of our models. We also show substantial cross-sectional variation in the cost of capital changes. We find that cost of capital changes were negatively related to both pre-regulation firm size and PIN. In addition to the findings regarding Regulation FD, this research contributes to a growing literature that documents links between firms’ information environments and their costs of capital.     

Activity-Based Pricing in a Monopoly

In this article, I study the interaction between cost accounting systems and pricing decisions in a setting where a monopolist sells a base product and related support services to customers whose preference for support services is known only to them. I consider two pricing mechanisms—activity‐based pricing (ABP) and traditional pricing—and two cost‐accounting systems—activity‐based costing (ABC) and traditional costing, for support services. Under traditional pricing, only the base product is priced, whereas support services are provided free because detailed cost‐driver volume information on the consumption of support services by each customer is unavailable. Under ABP, customers pay based on the quantities consumed of both the base product and the support services because detailed cost‐driver volume information is available for each customer. Likewise, under traditional costing for support services the firm makes pricing decisions on cost signals that are noisier than they are under ABC. I compare the equilibrium quantities of the base product and support services sold, the information rent paid to the customers, and the expected profits of the monopolist under all four combinations of cost‐driver volume and cost‐driver rate information. I show that ABP helps reduce control problems, such as moral hazard and adverse selection problems, for the supplier and increases the supplier's ability to engage in price discrimination. I show that firms are more likely to adopt ABP when their customer base is more diverse, their customer support costs are more uncertain, their costing system has lower measurement error, and the variable costs of providing customer support are higher. Firms adopt ABC when their cost‐driver rates for support services under traditional costing are noisier measures of actual costs relative to their cost‐driver rates under ABC and when the actual costs of support services are inherently uncertain. I also show that cost‐driver rate information and cost‐driver volume information for support services are complements. Although the prior literature views ABC and activity‐based management (ABM) as facilitating better decision making, I show that ABC and ABP (a form of ABM) are useful tools for addressing control problems in supply chains.     

The treatment of direct labor in cost/managerial texts

Cost/managerial textbook authors have typically defined and treated direct labor production costs as a pure variable cost that is proportionally related to the level of output. One implication of such treatment is that management will hire and fire workers as output levels vary. Historically, management did frequently adjust labor to reflect seasonal variations in sales and short-term changes in demand levels. This attitude was incorporated into the at-will employment rule.In the last few decades, the at-will employment rule has been successfully challenged in court. Other factors, such as the need for a highly trained work force and employment contract guarantees, have changed the nature of direct labor to that of a mixed or, in some cases, a fixed cost. In addition, at some highly automated plants, direct labor cost may be a small enough proportion of manufacturing cost to combine with overhead as a conversion cost.Accounting educators need to consider the effect this change may have on various managerial practices and methods. These include operational budgeting and cost-volume-profit analysis.     

Overhead cost allocation changes in a transfer pricing tax compliant multinational enterprise

This paper addresses how overhead cost allocation system design in multinational enterprises (MNEs) is affected by transfer pricing tax regulation. Using a case study research strategy we find that the implementation of a transfer pricing tax compliance strategy gives rise to a number of changes to the overhead cost allocation system design. Findings suggests that a contingent relationship exists between overhead cost allocation and transfer pricing tax compliance. We argue that when seeking to understand and explain MNEs’ overhead cost allocation system design for intra-company services, the MNEs’ response to its tax regulatory environment is a significant explanatory variable.     

On the interpretation of the estimated intercept in a regression of overhead cost on volume

When regressing overhead cost on units produced, it may be necessary to obtain separate estimates of fixed and variable overhead cost. However it has been suggested in the accounting literature that the constant term in the regression is only a non-interpretable Y-intercept. This note suggests that the constant term of a cost activity regression is fixed cost associated with the relevant range of activity. Furthermore, if changes in variable unit costs occurred within the period of observation, then the use of disaggregated data is required to obtain an unbiased estimator of fixed costs.     

Competitive Pricing in Markets with Different Overhead Costs: Concealment or Leakage of Cost Information?

This paper experimentally investigates how leaders and followers in a duopoly set prices for two product markets that have different overhead costs. In a fully crossed two-by-two design, we manipulate the participants' private cost report quality as either low or high, representing the extent to which these reports reveal that product markets have different overhead costs. We show that when only the leader is given a high-quality cost report, private cost information of higher quality is better incorporated into market prices (that are observable to participants). Both the leader and follower improve in profits and their prices better reflect the differences in overhead costs because the follower infers information from the leader's prices (information leakage). In contrast, when only the follower receives a high-quality cost report, the leader's profits and prices do not improve. This occurs because the follower conceals cost information when the leader has a low-quality cost report.     

The Evolution of Standard Costing in the U.K. and U.S.: From Decision Making to Control

Decision making and control are two fundamental components of industrial management that are aided by accounting information. This article traces the evolution of standard costing in the U.K. and U.S. and describes how it has served these two purposes over time. At the start of the industrial revolution, standard costing, in the form of past actual costs, aided managers in make-or-buy, pricing, outsourcing and other routine and special decisions. In the late nineteenth century, as the mass production of homogeneous products became more common, predetermined, norm-based standard costs were promoted as the means to control operations and reduce waste. The use of predetermined costs was recommended by both academic and professional branches well into the twentieth century. Since the mid-1980s, norm-based standards have come under fire for not providing appropriate strategic signals in an era of global competition, continuous improvement and perpetual cost reduction.
This article compares the nature of standard costing practices in the British Industrial Revolution with those that evolved in the U.S. under scientific management. The enquiry is not limited to double-entry systems and, like Miller and Napier (1993), the domain is broadened to include other forms of cost-keeping practices. We utilize primary and secondary sources to argue that the environment and rationales for standard costs have changed fundamentally over time. It is speculated that in the future standard costing will be used far less for individual accountability or operational control, but will return to its decision-making roots in the form of long-run cost targets that benchmark the success of continuous cost-reduction efforts.     

Are Selling,General, and Administrative Costs “Sticky”?

A fundamental assumption in cost accounting is that the relation between costs and volume is symmetric for volume increases and decreases. In this study, we investigate whether costs are "sticky"—that is, whether costs increase more when activity rises than they decrease when activity falls by an equivalent amount. We find, for 7,629 firms over 20 years, that selling, general, and administrative (SG&A) costs increase on average 0.55% per 1% increase in sales but decrease only 0.35% per 1% decrease in sales. Our analysis compares the traditional model of cost behavior in which costs move proportionately with changes in activity with an alternative model in which sticky costs occur because managers deliberately adjust the resources committed to activities. We test hypotheses about the properties of sticky costs and how the degree of stickiness of SG&A costs varies with firm circumstances.     

Earnings management and the allocation of net periodic pension costs to interim periods

We examine the pattern of reported quarterly net periodic pension costs. Quarterly pension costs are one of the largest single expense items for firms with pension plans (around 15% of income before extraordinary items in our sample). Under ASC 270, net pension costs should be recognized as incurred, or as the benefit provided by the expense is realized. We find that over the period of 2004–2010, there is significant variation in the amount of quarterly pension cost firms report. In addition, we find that income-increasing changes in pension costs are significantly associated with meeting or beating analysts' forecasts in a given quarter. We also show that income-decreasing changes to net periodic pension costs that would cause a firm to miss its earnings forecast are extremely rare. Finally, we find evidence that income-increasing and income-decreasing changes in quarterly pension costs are “settled up” in the fourth quarter (e.g., they are reversed).     

Absorption versus direct costing: the relevance of opportunity costs in the management of congested stochastic production systems

This paper investigates the relative performance of absorption versus direct costing procedures. Traditionally, absorption costing procedures have been defended on the basis of them acting as a proxy for hard to measure opportunity costs. We question the validity of this traditional defence by explicitly considering the extent to which absorption costing-based accounting calculations actually provide good proxies. Our analysis shows that in some situations absorption costing so over estimates opportunity costs that it would be preferable to use direct costing even though this implicitly assumes opportunity costs are zero. Thus, given that we establish that one can notalwaysuse the existence of opportunity costs as a defence for the adoption of absorption costing procedures we next identifyspecificconditions for which if satisfied, we can unambiguously defend the adoption of absorption costing. We develop an ‘open acceptance condition’ which if satisfied insures that a production system directed by absorption costs out performs a system based upon direct costs.     

Using technology to reveal true costs

Healthcare leaders should address three important questions as they prepare to implement new costing systems: Do all providers in their organizations' systems, networks, or partnerships share the same definitions of unit of care and of fixed, variable, incremental, direct, and indirect costs? What are the maintenance processes and protocols for cost center and period matching of revenues and costs? If some providers within a network or partnership are not using costing systems, can an enterprise derive surrogate cost per unit of care?     

The influence of change agents' behavioral intention on the usage of the activity based costing/management system and firm performance: The perspective of unified theory of acceptance and use of technology

This study adopts the viewpoint of the Unified Theory of Acceptance and Use of Technology (UTAUT) model to examine the change agents' behavioral intentions in the implementation of an activity based costing/management (ABC/M) system. ABC/M is an important management system that emphasizes the allocation of overhead costs on the basis of cost drivers, in order to provide relevant information for improved decision-making. A change agent is a person chosen to cause organizational change. Senior managers and often chief executives usually play the role that implements change. The behavioral intentions have been identified as a proactive attitude and action for promoting the ABC/M system in this study. Since there is little evidence of ABC/M adoption outside the United States and European countries, this research used Taiwanese companies as the sample. Questionnaires were used to investigate the factors influencing change agents' behavioral intentions to promote ABC/M systems and the type of facilitating conditions that affected the extent of usage of ABC/M systems. The questionnaires were carried out through the perspective of user acceptance of information technology (IT). Furthermore, the aim of this paper is also to explore whether use of the ABC/M system will produce an improved effect on performance. The empirical results from 100 valid responses collected indicate that performance expectancy and social influence directly affect change agents' behavioral intentions. Both change agents' behavioral intentions and facilitation conditions are important constructs that affect the extent of usage of ABC/M systems. The extent of ABC/M usage is also significantly associated with relative financial and non-financial performance. The results demonstrate that the adaptive UTAUT model is applicable for measuring change agents' behavioral intentions in current implementations of ABC/M systems. The study also reveals the positive effect of change agents on the performance of ABC/M systems.     

Early cost management practices, state ownership and market competition: the case of the Royal Textile Mill of Guadalajara, 1717-44

Existing literature on the deployment of cost techniques in early public sector organizations largely relies on archival evidence gathered from late eighteenth and nineteenth-century settings. Arguably, these contexts are characterized by a number of idiosyncratic characteristics that advise caution in generalizing conclusions beyond the institutional elements that forged those settings. Our investigation examines the case of the Royal Textile Mill of Guadalajara (RTM), a setting characterized by state ownership, competitive markets, organization of production around medieval guilds, and recruitment of foreign experts to conduct productive operations. Our findings show that the management of RTM deployed cost accounting techniques that comprised aspects such as control of raw materials and waste, control of labour and management, and allocations of overhead to product costing. We also find evidence which departs from predictions that standards relating to the control of raw materials should have preceded the implementation of labour cost standards.     

How to solve the cost crisis in health care

U.S. health care costs currently exceed 17% of GDP and continue to rise. One fundamental reason that providers are unable to reverse the trend is that they don't understand what it costs to deliver patient care or how those costs compare with outcomes. To put it bluntly, few health care providers measure the actual costs for treating a given patient with a given medical condition over a full cycle of care, or compare the costs they incur with the outcomes they achieve. What isn't measured cannot be managed or improved, and this is all too true in health care, where poor costing systems mean that effective and efficient providers go unrewarded, and inefficient ones have little incentive to improve. But all this can be remedied by exploring the concept of value in health care and carefully measuring costs. This article describes a new way to analyze costs that uses patients and their conditions--not organizational units or narrow diagnostic treatment groups--as the fundamental unit of analysis for measuring costs and outcomes. The new approach, called time-driven activity-cased costing, is currently being implemented in pilots at the Head and Neck Center at MD Anderson, the Cleft Lip and Palate Program at Children's Hospital in Boston, and units performing knee replacements at Sch?n Klinik in Germany and Brigham & Women's Hospital in Boston. As providers and payors better understand costs, they will be positioned to achieve a true "bending of the cost curve" from within the system, not in response to top-down mandates. Accurate costing also unlocks a whole cascade of opportunities, such as process improvement, better organization of care, and new reimbursement approaches that will accelerate the pace of innovation and value creation.     

Enhanced ABC costing for hospitals: directed expense costing

Space limitations do not allow a complete discussion of all the topics and many of the obvious questions that the preceding brief introduction to directed expense costing probably raised in the reader's mind. These include how errors in accounting practices like posting expenses to the wrong period are handled; and how the system automatically adjusts costs for expenses benefiting several periods but posted to the acquisition month. As was mentioned above, underlying this overtly simple costing method are a number of sophisticated and sometimes complex processes that are hidden from the normal user and designed to automatically protect the integrity and accuracy of the costing process. From a user's viewpoint, the system is straightforward, understandable, and easy to use and audit. From a software development perspective, it is not quite that effortless. By using a system that is understood by all users at all levels, these users can now communicate with each other in a new and effective way. This new communication channel only occurs after each user is satisfied as to the overall costing quality achieved by the process. However, not all managers or physicians are always happy that the institution is using this "understandable" cost accounting system. During one of the weekly meetings of a hospital's administrative council, complaints from several powerful department heads concerning the impact that the use of cost data was having on them were brought up for discussion. In defending the continued use of the system, one vice president stated to the group that cost accounting does not get any easier than this, or any less expensive, or any more accurate. The directed expense process works and works very well. Our department heads and physicians will have to come to grips with the accountably it provides us to assess their value to the hospital.