These five parts and the alternatives under each part are summarized in Exhibit 2-1. Note that many possible cost accounting systems can be designed from the various combinations of the available alternatives, although not all of the alternatives are compatible. Selecting one part from each category provides a basis for developing an operational definition of a specific cost accounting system.
In traditional full absorption costing and direct (or variable) costing systems, indirect manufacturing costs are allocated to products on the basis of a production volume related measurement such as direct labor hours. Thus, the fundamental differences between traditional systems and activity based systems are: 1) how the indirect costs are assigned (ABC uses both production volume and non-production volume related bases) and 2) which costs are assigned to products (in ABC systems, an attempt is made to assign all costs to products including engineering, marketing, distribution and administrative costs, although some facility related costs may not be assigned).At the present time, most of the companies that use the activity based method have developed stand alone, micro-computer based systems separate from the company's mainframe cost accounting system used for external reporting.4 The idea is to develop more accurate product costs than the traditional cost accounting system provides so that management can make better strategic decisions such as product introduction, pricing, mix and discontinuance. In these systems, ABC is not used as an inventory valuation method. Activity based costs are not charged to the inventory accounts. However, it is used to determine product costs once per year, or more frequently when changes are made in the production process. The activity based method is described in Chapter 7 and referred to frequently in other parts of the text.
Although last-in, first-out (LIFO) is frequently used for tax reporting purposes, it is not normally used in the accounting records. For this reason, we consider the FIFO and weighted average cost flow assumptions in Chapter 5, but leave the LIFO cost flow assumption for courses that emphasize financial and tax reporting.
5) Recording Interval Capability
Inventory records can be maintained on a perpetual or a
periodic basis. Conceptually, the perpetual inventory method provides a company
with the capability of maintaining continuous records of the quantities of
inventory and the costs flowing through the inventory accounts. The periodic
method, on the other hand, requires counting the quantity of inventory before
inventory records can be updated. In the past, manufacturers tended to keep
perpetual inventories, while retailers used the periodic method. However, today
a variety of modern point of sale devices and dedicated microcomputer software
are readily available to provide any company with perpetual inventory