Accounting Best Practices, Fifth Edition

Chapter 9. Costing Best Practices

This chapter is concerned with those best practices impacting the cost of products and the valuation of inventory. They are grouped into three main areas: information accuracy, cost reports, and costing systems. The first category, information accuracy, covers several best practices that review the accuracy of key information driving the costing of inventory: bills of material, labor routings, and units of measure. The second category, cost reports, is covered by the largest number of best practices. These are concerned with modifying or even eliminating the current cost-reporting systems in favor of a tighter focus on direct costs, materials, costs trends, and obsolete inventory. The final category, costing systems, addresses the two costing systems that should at least supplement, if not replace, traditional costing systems: activity-based costing and target costing. When the complete set of best practices advocated in this chapter has been implemented, a company will find that it has a much better grasp of its key product costs and how to control them.