Product Costing and Inventory Accounting: A New Approach to an Old Problem

Traditional methods of accounting—including full-absorption accounting, labor and cost standards, overhead allocations, and variance analysis–can stand in the way of attempts by managers and others to improve their company's overall performance and the ability to compete globally. Many companies have recognized the need to shift the role of accounting toward higher-value, more strategic tasks, such as financial and operational analysis, tactical decision support, and even process improvement and reengineering. But the accounting tools at their disposal often prove inadequate. In fact, there is a core conflict between the need to provide accurate and consistent financial reports for external consumption–reports that comply in all respects with GAAP, Sarbanes-Oxley, SEC requirements, and the like–and the need for value-relevant and informative reports for internal management purposes.
The author proposes using multiple sets of financial reports, all deriving from a single, common database, to meet external reporting requirements while addressing the distortions and limitations of GAAP for internal purposes. In particular, he has developed a new approach called Value Added Accounting that eliminates the distortions of full-absorption accounting but that uses GAAP financial statements as its starting point. The article describes the key adjustments, presents a case study, and discusses how VAA aligns with Lean Manufacturing, Quick Response Manufacturing, Just-In-Time, and other common process improvement initiatives.