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Cost accounting in Chicago

This is a very complex subject. Entire accounting classes and 1000 page textbooks are consistently written about this subject. There is no way that I can address this subject fully in this forum.

Example:

I operate a plant that makes four different types of products, all of which are finished goods. Last month we had $20,000 in fixed expenses. We produced our finished products in the following volumes:

Product A

1,000

Product B

1,000

Product C

10,000

Product D

8,000

Total

20,000

A reasonable person would say that a proper allocation per piece would be $20,000 divided by 20,000 pieces or $1 per unit produced.

OK. But that's not how it works in the real world. During that same month we had partially produced 6,000 units of Product A, and 4,000 of Product B. How do we cost it now?

Add to the equation the fact that at the beginning of the month 5,000 units of Product C and 3,000 of Product D were already partially constructed going into the month. How do we cost all of this now?

The reasonable answer would be to come up with an average cost over a three or four month period of time. OK. But what happens if the insurance and property taxes on the plant increased in the last month by 35%? Now averaging this over any period of time will give you costing numbers that are too low, because they don't reflect current costs.

If you don't do the difficult work necessary to come up with a cost per unit, how are you ever going to make a profit?

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