Roberta C Williams
P20197298
Managerial Accounting ACCT 5133
How Cost Accounting Distorts Product Costs
What is product costing? Product costing is the assignment of production costs to all output of
the organization. The authors of the article “How Cost Accounting Distorts Product Costs” goes into
detail about their research on different companies that use the product costing system. We will discuss
how using the product costing system can misrepresent the actual earnings due to fixed and variable
expenses.
In this article, the author lists several common characteristics that explain why product costs
have been distorted in some reports. Firstly, “The inability of the cost system to report variable cost was
a common feature of many of the systems we observed. Reporting variable product costs was the
exception, not the rule.” For the system to work, there needs to be accurate reporting of variable and
fixed costs as well. Next, “the use of a two-stage cost allocation system: in the first stage costs were
assigned to cost pools (often called cost centers), and in the second stage, costs were allocated from the
cost pools to the products.” The problem here lies in the use of allocation by direct labor hours in the
second stage. Shifting from direct labor hours to material dollars could help correct the uses of
“unrealistic bases” for allocation. Lastly, “the range in demand volume for products within a product line
was high, with sales of high volume products between 100 and 1000 times greater than sales of low
volume products. […] they all produced a large number of distinct products in a single facility. And […]
the products formed serval distinct product lines and were sold through diverse marketing channels.”
To understand the product costing system, we must understand variable costs. The author
