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NCJRS Abstract

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NCJ Number: 65484 Find in a Library
Title: COST ACCOUNTING COMES TO SERVICE INDUSTRIES
Journal: HARVARD BUSINESS REVIEW  Volume:56  Issue:5  Dated:(SEPTEMBER/OCTOBER 1978)  Pages:132-140
Author(s): J DEARDEN
Corporate Author: Harvard University
Graduate School of Business Admin
United States of America
Date Published: 1978
Page Count: 9
Sponsoring Agency: Harvard University
Boston, MA 02163
Format: Article
Language: English
Country: United States of America
Annotation: TRADITIONAL COST ACCOUNTING TECHNIQUES ARE IRRELEVANT TO MOST SERVICE ORGANIZATIONS; THE ONLY APPROPRIATE TECHNIQUE IS PRODUCT PROFITABILITY ANALYSIS.
Abstract: PRODUCT COST INFORMATION HAS FOUR PRINCIPAL USES IN MANUFACTURING INDUSTRIES: (1) INVENTORY VALUATION, (2) COST CONTROL, (3) SHORT-TERM PLANNING, AND (4) PRODUCT PROFITABILITY ANALYSIS. PRODUCT PROFITABILITY ANALYSIS IS THE ONLY USE APPLICABLE TO SERVICE ORGANIZATIONS, SINCE THE OTHER THREE USES IMPLY A MATERIAL ELEMENT IN THE PRODUCT ITSELF. IN THE APPLICATION OF PRODUCT PROFITABILITY ANALYSIS TO A SERVICE ORGANIZATION, 'PRODUCT' IS ANY IDENTIFIABLE SERVICE; 'PRODUCT GROUP' IS A GROUP OF RELATED SERVICES: AND 'PRODUCT LINE' IS A NUMBER OF RELATED PRODUCT GROUPS. ONE ALTERNATIVE FOR PRODUCT PROFITABILITY ANALYSIS WOULD BE TO USE SOMETHING LESS THAN UNIQUE COSTS (COSTS WHICH WOULD BE ELIMINATED IF THE SERVICE WERE NOT PROVIDED). THIS WOULD TEND TO APPROACH THE VARIABLE COST CONCEPT OF TRADITIONAL COST ACCOUNTING. CONTRIBUTION OVER VARIABLE COST IS NOT MEANINGFUL IN RANKING PRODUCTS, BECAUSE SOME PRODUCTS WITH A HIGH CONTRIBUTION MIGHT BE CREATING A REAL ECONOMIC LOSS WHEN ALL OF THE COSTS THAT WERE INCURRED DIRECTLY AS THE RESULT OF PRODUCING AND MARKETING THE PARTICULAR PRODUCT WERE CONSIDERED. ANOTHER ALTERNATIVE TO UNIQUE COSTS WOULD BE TO INCLUDE SOMETHING MORE THAN UNIQUE COSTS, WHICH WOULD MEAN ALLOCATING SOME OR ALL OF THE JOINT COSTS (COSTS INCURRED WHETHER OR NOT A PARTICULAR SERVICE IS PROVIDED) INCURRED IN PRODUCING AND MARKETING THE SERVICE. JOINT COSTS HAVE NO ECONOMIC REALITY WHEN ALLOCATED TO INDIVIDUAL PRODUCTS, BECAUSE, BY DEFINITION, JOINT COSTS WILL NOT CHANGE WHETHER OR NOT A PRODUCT IS BEING PRODUCED. ALL ALLOCATIONS OF SUCH COSTS ARE THUS ARBITRARY. THE ONLY MEANINGFUL COSTS FOR PRODUCT PROFITABILITY ANALYSIS, THEREFORE, ARE THOSE THAT CAN BE UNIQUELY ATTRIBUTED TO A PRODUCT, USING A TECHNIQUE FOR SEPARATING UNIQUE AND JOINT COSTS AND FOR ASSIGNING THE UNIQUE COSTS TO THE PRODUCTS PRODUCED. (AUTHOR ABSTRACT MODIFIED--RCB)
Index Term(s): Cost analysis; Services; Services effectiveness; Social service agencies; Techniques
To cite this abstract, use the following link:
http://www.ncjrs.gov/App/publications/abstract.aspx?ID=65484

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