The determination of product manufacturing costs is complex, involving both the capture of direct costs and the allocation of indirect costs. Direct costs can be captured routinely in the course of recording the consumption of resources by a work order. Even here, the allocation of production costs to inventory requires policy decisions based on the company's costing objectives.
The allocation of indirect costs has received new interest in recent years with the advent of "Activity Based Costing" techniques. These involve identifying the activities performed by each overhead department, and allocating its total expenses to those activities. Each of these activities may then be associated with some measure of output from the activity, which is used as a "cost driver" to allocate the activity to products or departments.
For a company to introduce activity based costing (or any new costing system, for that matter) requires extensive analysis of the activities performed by each part of an organization and the relationships of those activities to the production process. Policy decisions must be made as to what drivers will be used for each activity, what algorithms will be used for evaluating inventory, and so forth. This in turn requires extensive education of all concerned as to the implications of the decisions and the new ways of proceding.
Essential Strategies Consultants have worked in the costing area for many years and can be of help in analyzing the organization and its procedures, modeling cost structures, deciding on policy, and educating all concerned.