Process Costing: The Most Important Subject in the Management Accountant's Curriculum

• Published date: 01 April 2018
• DOI: http://doi.org/10.1002/jcaf.22334
• Date: 01 April 2018

141

© 2018 Wiley Periodicals, Inc.

Published online in Wiley Online Library (wileyonlinelibrary.com).

DOI 10.1002/jcaf.22334

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Process Costing: The Most

Important Subject in the Management

Accountant’s Curriculum

Alan Vercio

INTRODUCTION

This article presents an

opinion that financial account-

ing subjects—job order

inventory valuation, process

inventory valuation, financial

statement analysis, cash flow

statements, and overhead-based

costing should be removed

from the managerial account-

ing text books and put in finan-

cial accounting text books. This

would free up text book space

and classroom time to focus

on one of the most important

skills a management accoun-

tant should enter the business

with—process costing.

EXAMPLES THAT

DEMONSTRATE WE DO NOT

TEACH PROCESS COSTING

Current process cost mate-

rial primarily focus is inventory

valuation, including weighted-

average and First-in First-out

(FIFO). I understand why we

should teach inventory valua-

tion to financial accountants,

but I do not understand why

we teach inventory valuation

to managerial accountants. I

have never met a business man-

ager who found the cost of a

partially completed product,

or even Generally Accepted

Accounting Principles

(GAAP)-based inventory value

of a completed product useful

in strategic decisions.

Another indication we do

not teach useful process cost-

ing is the use of overhead. By

definition, overhead is a combi-

nation of all sorts of costs that

have no direct relationship to

each other or the unit being pro-

duced. I would be the first per-

son to use large overhead alloca-

tion methods to value inventory

for external reporting but the

last person to use overhead

allocation methods to support

strategic decisions. Later in this

article, I will demonstrate how

overhead disappears through

driver-based process costing.

Management accounting

texts include master budget-

ing built from a financial

accounting perspective but not

from an operations perspec-

tive. A quality financial plan,

and related budget, must be

preceded by a quality process-

based operational plan. If the

financial plan is not a mirror

of the operational plan, it will

be very difficult for operations

to explain why costs change. In

two industries—healthcare and

financial services—a formal

process-based operational plan

does not exist. This omission

should be a red flag to manage-

ment accountants.

REASONS WHY WE SHOULD

TEACH PROCESS COSTING

Job order industries are

very few. They include con-

struction, government research

and development contracting,

and the beginning of a few

retail businesses supply chains.

The majority of industries are

process based. With few excep-

tions the following process

industries include—retail, man-

ufacturing, assembly, refinery,