Management Accounting Section Midyear Meeting

The Unified Product Costing System for Multiple Purposes: Case Evidence from a Japanese Electronics Manufacturer

• In Event: Break/Research Exhibition 3: Incentives and Cost Management

Abstract

Product costing plays an important role in the various aspects of accounting mechanisms. A more properly constructed product costing model enables firms to calculate product costs and profitability more accurately, thus providing useful information for pricing, cost management, budgeting, and so on. It is said that the product costing system often has two-sidedness, namely, product cost accounting and profitability analysis. In the context of financial accounting, the product costs consists of only manufacturing costs, since selling, general, and administrative expenses (SG&A) are regarded as period costs. Therefore, this product cost accounting can be called a manufacturing cost. However, to formulate and implement an appropriate product strategy based on profitability by product/service and customer, it is necessary to analyze profitability accurately based on the product cost concept including manufacturing and SG&A costs. Although product cost accounting and customer profitability analysis are very closely related, there is not enough research on the linkages between them. Therefore, this paper addresses the shortcomings of previous separate frameworks by clarifying how to unify them. We have conducted a continuous survey since June 2016 targeting Hitachi, a Japanese electrical equipment manufacturer, finding that it uses a unique product costing system that includes aggregate manufacturing costs, SG&A expenses, interest, and part of extraordinary losses such as the loss on disposal of fixed assets. Based on this very unique product cost concept and product costing system, Hitachi analyzes profitability by project, customer, and order accurately, thus implementing product strategies effectively. In addition, the unified product costing system provides useful information for the management on the upstream of the value chain such as determining target costs in the design phase and negotiating price in the order-acquisition phase. In other words, it provides cost information useful for both the ex-post performance measurement and the ex-ante decision-making. When the SG&A expenses increase, the customer profitability analysis based on such routine mechanisms becomes particularly significant. Moreover, the development of information technology and the aggregation of cost information are closely related. Therefore, our results provide implications not only for accounting research, but also for several adjacent research fields such as marketing and information technology.

Authors

• Takahiro Morimitsu, Seinan-Gakuin University

• Hiroto Kataoka, Meiji University

• Yukihiko Okada, University of Tsukuba