ASME Cost Accounting

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ASME Cost Accounting
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Full Cost AccountingPresentation Outline

• What is full cost accounting?
• Why are we doing this?
• What are the advantages and disadvantages?
• What are the issues?
• What is the development process?
• How can you be a player?
• Conclusions
• QA on both Fair Equitable Accounting and Full
  Cost Accounting

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Full Cost AccountingDefinition

• A model that provides details on all the costs
  associated with producing a product or service

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Definitions

• Definitions are flexible, and may vary by
  organization
• GA (SGA)
• Direct
• Indirect
• Service Charges

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Definitions

• Being in one category (direct, indirect,
  overhead, etc.) or another does not make a cost
  more or less legitimate.
• Example Is a consulting charge more legitimate
  because it is a direct expense compared to a
  staff expense, which may be an indirect
  allocation? No.

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GA

• General Administrative or Overhead
• Includes BOG Governance, Accounting, HR,
  Executive Operations, Legal Audit, etc. (and
  some staff)
• Also includes Honors Awards, LAN/WAN, and
  Centralized Marketing
• Is about 15 (18 allocated) of total expenses
  very low per external auditors
• ASMEs current government-approved overhead rate
  is 43 (it uses a different formula) also very
  low

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Direct/Indirect

• Direct
• Usually vendor charges, production, postage, food
  beverage, travel
• Sometimes includes staff
• Indirect
• Usually includes facilities, telephone, staff
• Hybrid
• Some costs may be either direct or indirect

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Example Consulting Expense

• Direct
• Consultant is hired to develop specific course
  content or to instruct a particular course
• Indirect
• Consultant is engaged to evaluate a profit
  center, such as the slate of continuing education
  or conference offerings
• GA
• A consultant is hired to evaluate the slate of
  ASME product and service offerings

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Service Charges

• Certain services are centralized and charged
  based upon usage and cost drivers (Service
  Charges)
• Warehouse, Facilities, Office Services,
  Information Central, Marketing, IT, and more
• Costs are charged based upon cost drivers (ABC
  Activity-Based Costing)
• Examples
• Successes
• Failures
• Misunderstandings
• Service charges can be direct, indirect, or part
  of overhead

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Current Cost Accounting Practices at ASME

• At present, ASME
• Does not allocate GA
• Did use service charges (an Activity Based Cost
  accounting model) through FY 04
• Cost accounting temporarily suspended in FY 05 to
  facilitate reorganization
• Leaves allocation of direct indirect charges up
  to Councils

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Why are we talking about this?

• Full Cost Accounting has been identified as a
  Balanced Scorecard Initiative by the Board of
  Governors

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Cost Accounting

• Advantages
• Better idea of full cost of products services
• Prices will presumably reflect full costs
• Better management of internal costs
• Leads to good decision making

• Disadvantages
• Takes time away from essential duties
• More accountants
• Laden with arguable assumptions
• Brother-in-Law paradox
• Leads to bad decision making

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Developmental Issues Balance

• Fairness
• Simplicity

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Developmental Issues

• Simplicity vs. Fairness
• Allocation vs. Activity-Based Costing

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Developmental Issues Basis

• Allocations/Costing based upon
• Head count
• Revenue
• Expense
• Floor space
• Usage/Cost Drivers
• Judgment
• Time sheets
• All have their advantages and disadvantages

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Developmental Issues Time Reporting

• Time tracking
• Staff and/or Volunteer
• Precise, but accurate?
• Compliance requirements
• Return on investment

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Issues Precision vs. Accuracy

• Precision vs. Accuracy
• Do not confuse precision with accuracy
• Accounting systems can be very precise, and at
  the same time very inaccurate

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Developmental Issues Time Reporting

• Depth of Application
• Sector
• Cost Center
• Program
• Product/Service
• ROI
• Accuracy
• Fixed or Flexible Approach?

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Cost Accounting Problems

• Cost accounting systems provide
• an answer,
• not necessarily
• the answer.

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Cost Accounting Problems

• Cost accounting systems provide
• information on cost, but usually ignore
  important issues such as quality, reliability,
  continuity, and control

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Cost Accounting Problems

• People often lose the the big picture as they
  obsess over gaming the cost accounting system
• Some people spend their time trying to manage
  those costs over which they have the least
  control or which wont improve the organizations
  bottom line

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Cost Accounting Problems

• Cost accounting systems are not a substitute for
  strong leadership looking at the big picture

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Cost Accounting Dilemmas

• Contribution Margin Example
• A division of a company can produce a product and
  sell it at a cost of 80/unit and a sales price
  of 100/unit. The overhead charges would amount
  to 40/unit. Should the Division make the
  product?

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Cost Accounting Dilemmas

• Intracompany pricing
• Division A can buy a needed part more
  inexpensively than Division B of the same company
  would charge for the same part. Should Division
  A buy it from the outside?

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Full Cost Accounting Timeline

• Full cost accounting is a Balanced Scorecard
  initiative
• For FY 05 we are moving in the opposite direction
  temporarily to reduce confusion during the
  reorganization and development of the FY 06
  budgets
• Full cost accounting model Society-wide to be
  developed during FY 05 for application in FY 06
• Methodologies TBD
• New model will be applied in Fall 05
  retroactively for FY 06

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Full Cost Accounting Timeline
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Conclusions

• Full cost accounting has its advantages and
  disadvantages
• It will provide some answers, but also raise more
  questions
• Used properly, it can provide some insights
• Used improperly, it can lead to reactive,
  short-sighted mistakes that will hurt the
  organization
• We will proceed with development of a full cost
  accounting system

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Im still interested, how do I participate?

• Go to the Cost Accounting site under the CoP
  website _at_ https//cop.asme.org/COP
• Please post questions, comments, anecdotes,
  suggestions, etc on the discussion board so
  everyone can share
• Presentations are also on the website

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• Fair Sustainable Accounting
• and
• Full Cost Accounting
• QA