Full Cost Accounting

ASME Cost Accounting

Full Cost AccountingPresentation 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 AccountingDefinition

• A model that provides details on all the costs associated with producing a product or service

Definitions

• Definitions are flexible, and may vary by organization

– G&A (SG&A)

– Direct

– Indirect

– Service Charges

Definitions

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

G&A

• General & Administrative or “Overhead”• Includes BOG & Governance, Accounting, HR,

Executive Operations, Legal & Audit, etc. (and some staff)

• Also includes Honors & Awards, LAN/WAN, 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); also very low

Direct/Indirect

• Direct– Usually vendor charges, production, postage,

food & beverage, travel– Sometimes includes staff

• Indirect– Usually includes facilities, telephone, staff

• Hybrid– Some costs may be either direct or indirect

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

Service Charges• Certain services are centralized and charged based

upon usage and “cost drivers” (Service Charges):– Warehouse, Facilities, Office Services,

Information Central, Marketing, IT, and more– Costs are charged based upon cost drivers

(ABC: Activity-Based Costing)– Examples:

• Successes• Failures • Misunderstandings

• Service charges can be direct, indirect, or part of overhead

Current Cost Accounting Practices at ASME

• At present, 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

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– “Brother-in-Law”

paradox– Leads to bad decision

making

Developmental Issues: Balance

• Fairness

• Simplicity

Developmental Issues

• Simplicity vs. Fairness– Allocation 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

Developmental Issues: Time Reporting

• Time tracking– Staff and/or Volunteer– Precise, but accurate?– Compliance requirements– Return on investment

Issues: Precision vs. Accuracy

• Precision vs. Accuracy– Do not confuse precision with accuracy– Accounting systems can be very precise,

and at the same time very inaccurate

Developmental Issues: Time Reporting

• Depth of Application

Sector

Cost Center

Program

Product/Service

• ROI• Accuracy• Fixed or Flexible Approach?

Cost Accounting Problems

Cost accounting systems provide

an answer,

not necessarily

the answer.


Cost accounting systems provide

information on cost, but usually ignore important issues such as

quality, reliability, continuity, and control


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 systems are not a substitute for strong leadership

looking at the big picture

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. The overhead charges would amount to $40/unit. Should the Division make the product?

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

Full Cost Accounting TimelineMar 04 Conceptual discussion at TEC

Jun 04 Full Cost Accounting adopted as a BSC Initiative

Aug 04 Full cost accounting assigned to the Finance Project Task Force

Fall 04 Groundwork, informal information gathering

Nov 04 Official kickoff

Nov 04 -May 05

Full cost accounting model development

May 05

Jun 05

First reading of model by COFI

First reading of model by BOG

Sep 05

Sep 05

COFI recommends model

BOG approves model

Oct 05 Model is retroactively applied for all FY 06

Conclusions

• Full cost accounting has its advantages and disadvantages

• It will provide some answers, but also raise more questions

• Used properly, it can provide some insights• Used improperly, it can lead to reactive, short-

sighted mistakes that will hurt the organization• We will proceed with development of a full cost

accounting system

I’m still interested, how do I participate?

Go to the Cost Accounting site under the CoP website @ https://cop.asme.org/COP

Please post questions, comments, anecdotes, suggestions, etc on the discussion board so everyone can share

Presentations are also on the website

Fair & Sustainable Accounting

and

Full Cost Accounting

Q&A

Documents

Full Cost Accounting