HOW COST ACCOUNTING DISTORTS PRODUCT COSTS 265
the low-volume products as the most profitable, while the strategic cost analysis
indicated exactly the reverse.
There are three important messages in the table and in the company’s findings
in general.
žTraditional systems that assign costs to products using a single volume-related
base seriously distort product costs.
žThe distortion is systematic. Low-volume products are under-costed, and
high-volume products are over-costed.
žAccurate product costs cannot, in general, be achieved by cost systems that rely
only on volume-related bases (even multiple bases such as machine hours and
material quantities) for second-stage allocations. A different type of allocation
base must be used for overhead costs that vary with the number of transactions
performed, as opposed to the volume of product produced.
The shift to transaction-related allocation bases is a more fundamental change
to the philosophy of cost-systems design than is at first realized. In a traditional
cost system that uses volume-related bases, the costing element is always the
product. It is the product that consumes direct labor hours, machine hours, or
material dollars. Therefore, it is the product that gets costed.
In a transaction-related system, costs are assigned to the units that caused the
transaction to be originated. For example, if the transaction is a setup, then the
costing element will be the production lot because each production lot requires a
single setup. The same is true for purchasing activities, inspections, scheduling,
and material movements. The costing element is no longer the product but those
elements the transaction affects.
In the transaction-related costing system, the unit cost of a product is determined
by dividing the cost of a transaction by the number of units in the costing element.
For example, when the costing element is a production lot, the unit cost of a
product is determined by dividing the production lot cost by the number of units
in the production lot.
This change in the costing element is not trivial. In the Schrader Bellows strategic
cost analysis (see Table 1), product seven appears to violate the strong inverse
relationship between profits and production-lot size for the other six products.
A more detailed analysis of the seven products, however, showed that product
seven was assembled with components also used to produce two high-volume
products (numbers one and six) and that it was the production-lot size of the
components that was the dominant cost driver, not the assembly-lot size, or the
shipping-lot size.
In a traditional cost system, the value of commonality of parts is hidden. Low-
volume components appear to cost only slightly more than their high-volume
counterparts. There is no incentive to design products with common parts. The
shift to transaction-related costing identifiesthe much lower costs that derive
from designing products with common (or fewer) parts and the much higher
costs generated when large numbers of unique parts are specified for low-volume
products. In recognition of this phenomenon, more companies are experimenting