Measuring Costs Requires Judgment

Learning Objective 7 Explain why product costs are computed in different ways for different purposes

• examples are pricing and product-mix decisions, government contracts, and financial statements

We turn our focus back to how cost accounting is used by management accountants. Measuring costs involves a lot of judgment. That is, there are many alternative ways for management accountants to define and classify costs. Generally, the best way to measure a cost depends on the specific situation, purpose, or question that management is trying to address. Moreover, different companies or sometimes even different subunits within the same company may define and classify costs differently. Thus, it is very important to clearly define and understand how costs are measured in a particular situation or company.

Labor Costs

To illustrate the above point, consider labor costs for software programming at companies such as Apple, where programmers work on different software applications for products like the iMac, the iPad, and the iPhone.

1. • Direct programming labor costs that can be traced to individual products
2. • Overhead costs (labor related)
   1. • Indirect labor cost compensation for
      1. Office staff
      2. Office security
      3. Rework labor (time spent by direct laborers correcting software errors)
      4. Overtime premium (wages paid in excess of straight-time rates for overtime work)
      5. Idle time (wages paid for unproductive time caused by lack of orders, computer breakdowns, delays, poor scheduling, and the like)
   2. • Salaries for managers, department heads, and supervisors
   3. • Payroll fringe costs (explained later)

Although labor cost classifications vary among companies, many companies use multiple labor cost categories and subclassifications as above. In general, the salaries of those regarded as management are placed in a separate classification of labor-related overhead and not classified as indirect labor costs.