Jack TenneyExtra Point

by Jack Tenney, Publisher

November 2004

Cost Accounting

Stanley D. looked like a defenseman who played for the Bruins and was always in the penalty box for fighting tall, bald and bloody nosed. But Dumma, or Mr. D., was my cost accounting professor, not a hockey player. Nevertheless, he was tall, bald and, on the one occasion he got a nosebleed during class he just kept lecturing.

So pay attention, this is good stuff.

Cost accounting is the numerical poetry of manufacturing. It encompasses the methods for calculating the financial effect of all the little nuances that make a properly connected pile of parts go "vroom-vroom!" Cost accounting for mass produced items is a rigorous form of socialism. Each manufactured piece or part shares equally the burdens of operating the factory.

For example, the Kludge Manufactuuring Company produces one kludge a day. It does this every day except Saturday and Sunday, six Monday holidays plus all the traditional ones, and maybe even two weeks in July when it shuts down for a factory vacation. Each kludge has 120 fabricated parts and subassemblies on which 15 people work together on a production line to assemble and get out the door.

Simple question: How much does a kludge cost?

Hint: Factories are often rented by the month.

Hint, hint: Months vary in the number of work days.

Answer: Socialize the costs so that all kludges cost the same within one product year (typically, a full 12-month fiscal year). My old accounting professor was adamant about this.

He would challenge, "Do you think a product produced in February costs more than a product made in June? Why? Because February is colder and shorter than June?"

So when I risked saying, "Well, it does make kind of sense, you know." He countered, "Why, then, wouldn't you just make products during 31-day months, preferably 31-day warm months, preferably ones without holidays. Why not just make everything in August?"

The extra point is that a kludge that looks and acts like a kludge "costs" the same regardless of whether it was made during a snowstorm or a heat wave; whether it was built in a short month with a holiday, like February, or a long month with no holiday, like August. It really shouldn't matter to the cost whether it was constructed by minimum-wage earners or premium-paid folks on overtime. It should have a standard cost that takes into account materials, labor and overhead. But, of course, things never cost in the particular what was standardized in the general. That's what variances are for. Mr. D's short list of variances included: purchase price, material usage, efficiency, wage rate, spending, volume and calendar.

Of course, shipping and handling are extra.