ASME Cost Accounting

Full Cost AccountingPresentation OutlineWhat 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?ConclusionsQ&A on both Fair & Equitable Accounting and Full Cost Accounting

Full Cost AccountingDefinitionA model that provides details on all the costs associated with producing a product or service

DefinitionsDefinitions are flexible, and may vary by organizationG&A (SG&A)DirectIndirectService Charges

DefinitionsBeing 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&AGeneral & Administrative or OverheadIncludes BOG & Governance, Accounting, HR, Executive Operations, Legal & Audit, etc. (and some staff)Also includes Honors & Awards, LAN/WAN, and Centralized MarketingIs about 15% (18% allocated) of total expenses very low per external auditorsASMEs current government-approved overhead rate is 43% (it uses a different formula); also very low

Direct/IndirectDirectUsually vendor charges, production, postage, food & beverage, travelSometimes includes staffIndirectUsually includes facilities, telephone, staffHybridSome costs may be either direct or indirect

Example: Consulting ExpenseDirectConsultant is hired to develop specific course content or to instruct a particular courseIndirectConsultant is engaged to evaluate a profit center, such as the slate of continuing education or conference offeringsG&AA consultant is hired to evaluate the slate of ASME product and service offerings

Service ChargesCertain services are centralized and charged based upon usage and cost drivers (Service Charges):Warehouse, Facilities, Office Services, Information Central, Marketing, IT, and moreCosts are charged based upon cost drivers (ABC: Activity-Based Costing)Examples: SuccessesFailures MisunderstandingsService charges can be direct, indirect, or part of overhead

Current Cost Accounting Practices at ASMEAt present, ASME:Does not allocate G&ADid use service charges (an Activity Based Cost accounting model) through FY 04Cost accounting temporarily suspended in FY 05 to facilitate reorganizationLeaves 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 AccountingAdvantagesBetter idea of full cost of products & servicesPrices will presumably reflect full costsBetter management of internal costsLeads to good decision makingDisadvantagesTakes time away from essential dutiesMore accountantsLaden with arguable assumptionsBrother-in-Law paradoxLeads to bad decision making

Developmental Issues: BalanceFairnessSimplicity

Developmental IssuesSimplicity vs. FairnessAllocation vs. Activity-Based Costing

Developmental Issues: Basis Allocations/Costing based upon:Head countRevenueExpenseFloor spaceUsage/Cost DriversJudgmentTime sheetsAll have their advantages and disadvantages

Developmental Issues: Time ReportingTime trackingStaff and/or VolunteerPrecise, but accurate?Compliance requirementsReturn on investment

Issues: Precision vs. AccuracyPrecision vs. AccuracyDo not confuse precision with accuracyAccounting systems can be very precise, and at the same time very inaccurate

Developmental Issues: Time ReportingDepth of ApplicationSectorCost CenterProgramProduct/ServiceROIAccuracyFixed or Flexible Approach?

Cost Accounting ProblemsCost accounting systems provide an answer, not necessarily the answer.

Cost Accounting ProblemsCost accounting systems provide information on cost, but usually ignore important issues such as quality, reliability, continuity, and control

Cost Accounting ProblemsPeople often lose the the big picture as they obsess over gaming the cost accounting systemSome people spend their time trying to manage those costs over which they have the least control or which wont improve the organizations bottom line

Cost Accounting ProblemsCost accounting systems are not a substitute for strong leadership looking at the big picture

Cost Accounting DilemmasContribution 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 DilemmasIntracompany 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 TimelineFull 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 budgetsFull cost accounting model Society-wide to be developed during FY 05 for application in FY 06Methodologies TBDNew model will be applied in Fall 05 retroactively for FY 06

Full Cost Accounting Timeline

ConclusionsFull cost accounting has its advantages and disadvantagesIt will provide some answers, but also raise more questionsUsed properly, it can provide some insightsUsed improperly, it can lead to reactive, short-sighted mistakes that will hurt the organizationWe will proceed with development of a full cost accounting system

Im still interested, how do I participate?Go to the Cost Accounting site under the CoP website @ https://cop.asme.org/COPPlease post questions, comments, anecdotes, suggestions, etc on the discussion board so everyone can sharePresentations are also on the website

Fair & Sustainable AccountingandFull Cost Accounting Q&A