According to Brimson, feature costing is becoming the alternative to activity-based costing (ABC). Feature costing helps reduce company cost and improve performance due to less data needed to create product cost.
Why the Need for Feature Costing
Conventional overhead cost methods provide distorted cost because the data on financial performance is received too late for errors to be corrected. Also, the conventional method arbitrarily assigns managers with the responsibility of accounting for cost that they have no control over. Activity-based costing was developed to help improve the deficiencies of conventional overhead costing. Unfortunately, activity-based costing can become so detailed and complex that it is hard to create and maintain. Feature costing provides the same great advantages of activity-based costing, yet it is easier to use.
How to Conduct Feature Costing
1: Determine the Product Features
In step 1 the features of each product are determined. A feature is a major element of a product. The features of a product are then divided into sub-features. This process continues until sub-features no longer vary. In this article, a car was used as an example to show how to determine the features of a car. The main feature of a car would be the engine. The engine could then be classified into sub-features such as gas or diesel and number of cylinders.
2: Determine the Activity Routing Associated with Each Product Feature
In step 2 the working steps involved with the product features, established in step 1, are determined. The working steps are the activities that are needed to make a feature of a product.
3: Determine the Cost of Each Activity
In this step, the cost of each activity in step 2 is determined. The cost of an activity can consist of "people, machines, travel, supplies, computer systems…" that are involved with each activity (Brimson, 10). Also during this step, an average activity cost is computed by doing an analysis of each activity. This average activity cost will be used to compute the final product cost.
Step 4: Determine Product Characteristics that Will Cause the Process to Vary
In step 4 product characteristics are determined. A product characteristic gives the product its distinction. In the example of the car, some product characteristics would be the number of doors and the color of the car. It is then determined if these product characteristics will cause a variation "such as additional work steps, longer processing time, and/or quality problems" (Brimson, 10).
Step 5: Determine How Much the Product Characteristics Cause the Process to Vary
In this step the product characteristics determined in step 4 are considered to see how much they will impact the product process. If the product characteristics will cause a loss, it needs to be determined how much of a process loss will need to be added to the final product cost.
Step 6: Associate Features and Characteristics to Products
At this step, the features and characteristics that were determined in steps 1and 4 are associated back to their product.
Step 7: Adjust the Activity Cost Based on the Product’s Features and Characteristics
The final step involves computing the product cost. All costs that were determined in the previous steps are added together to compute the final product cost.
Advantages of Feature Costing
This article lists several advantages of feature costing over the conventional overhead allocation method and activity based costing method. One advantage is that feature costing uses the process management model. This model allows for a better understanding of product costing. Another advantage of feature costing is the ease of use over previous methods. This is due to the fact that less data is needed to calculate the product cost. The last advantage is that feature costing determines the factors that cause a variation to occur. This allows for improvements to be made to the product process.
"Feature costing is a logical next step in the evolution".