I’ve seen a few things lately that aggravated something that I’ve found an irritant in costing discussions (both written and verbal) for nearly thirty years, so I thought my fellow PACE members wouldn’t mind by venting about it to get it out of my system…
Standard Costing is not GAAP – it’s a way of valuing inventories and determining cost of goods sold that can be used to approximate GAAP, but it is not GAAP. GAAP includes things like FIFO, LIFO, Weighted Average Cost, etc. It’s just a simplified data-handling and computation-making methodology that also generates somewhat useful variance information. People should not refer to it in debates about costing practices as if it were an accounting principle.
Standard Costing is not a synonym for the assignment of indirect manufacturing costs (overhead) to products using direct labor (or any other single-volume driver) as a base. Standard costing in not direct labor-based costing. Most standard costing systems have been designed to link overhead to products using direct labor because that has been ‘the norm’ for eons and IT’s challenges in designing the systems have been focused on handling all of the detailed data and computations, not on the conceptual design of the overall cost model. Standard costing software was built on the traditional industry practices that were developed when data handling capabilities were very limited. Those capabilities are now much greater and continuation of the traditional industry practices are now just a mental, not a physical or technical, constraint.
You can have a standard cost system that is causality-based with multiple drivers and does, therefore, reasonably reflect economic reality for the types of decisions it is designed to support and insights it is designed to provide. Those decisions and insights are, however, very limited. Most decision cost information cannot be provided by a standard costing system, even one that is causality-based because, by their nature, they generate fully-absorbed costing information that is limited to “inventoriable only” costs. Most decisions require incremental total cost information, something standard costing does not provide – even with rates split into fixed and variable. Arguing that is isn’t good for decision making is like arguing that a Rolls Royce is a piece of garbage because it can’t cross a body of water without the aid of a bridge. The argument is irrelevant. It’s a great car when you use in where it was intended; on dry land.
The phrase “Standard Costing” should not be used as shorthand for something that is not standard costing. It is counterproductive. It’s like calling a brussels sprout an avocado and then arguing that avocados make lousy party dips. It doesn’t do any good for either the pro-brussels sprout or anti-brussels sprout advocate to call it an avocado. It also makes it appear that neither party actually knows what they are talking about.
What do you think?