This chapter presents a set of principles, methods and techniques used to value the inventory and the cost of goods sold. By extension, these techniques can also be adjusted to assess the profitability of products, services, customers, divisions or functions of a firm.
This topic is relatively heavy because it has a long history of intense debates about what is the proper way to compute the cost of anything. You will have to choose between several options at every step of the costing process and the choices you will make will be guided by the purpose and the desired properties and meaning of the information produced.
The purpose to which we will pay the most attention here is asset valuation, and more specifically the valuation of inventory, self-produced equipment or intangibles. This is an activity where financial accounting and management accounting are closely intertwined. This close collaboration is not without frictions, as financial accountants and management accountants tend to favor different qualities of information (see section 13) which often orient them towards different accounting choices.
In this chapter, I will also elaborate on the reasons why the numbers produced by costing for financial reporting should be used with caution in decision making. They are better used for attention directing and other methods presented in subsequent chapters will provide better guidance for problem solving, alternative evaluation, and decision making.
At the end of this chapter, you should be able to: