United States Department of Agriculture

Forest 

Service

General Technical 

Report NRS-140

Northern 

Research Station December 2014

Product Costing Guide 

for Wood Dimension and 

Component Manufacturers
The Authors

ADRIENN ANDERSCH, graduate research assistant, Virginia Tech.

URS BUEHLMANN, associate professor, Virginia Tech.

JEFF PALMER, information technology specialist, U.S. Forest Service.

JANICE K. WIEDENBECK, research forest products technologist, U.S. Forest Service.

STEVE LAWSER, Executive Director, Wood Component Manufacturers Association 

(WCMA).

The use of trade, firm, or corporation names in this publication is for the information and

convenience of the reader. Such use does not constitute an official endorsement or 

approval by the U.S. Department of Agriculture or the Forest Service of any product or 

service to the exclusion of others that may be suitable.

This software program discussed in this report is provided “as is” without warranty of any 

kind. The authors do not warrant, guarantee, or make any representations regarding the 

use or the result of the software or documentation in terms of their correctness, reliability, 

currentness, or otherwise.

Abstract

The North American hardwood dimension and components industry plays a critical role 

in the hardwood forest products industry as the industry is a user of high-value hardwood 

lumber. Customer expectations, global markets, and international competition, however, 

require hardwood dimension and components manufacturers to continuously improve 

their ability to manage their products and businesses. Accurate and timely product costing 

information is critically important for companies in planning the optimal utilization of 

company resources. While an overestimation of product costs can lead to loss of potential 

business and market share, underestimation of product costs can result in financial losses 

to the company.

This paper introduces a product costing software package called WoodCite, which is 

designed specifically for small and medium-sized hardwood dimension and components 

manufacturers. WoodCite allows companies to determine product costs and create 

competitive bids based on their information. WoodCite uses a regression model to estimate 

overhead cost of a product based on historical cost information provided by the user. The 

application is available for free at http://www.nrs.fs.fed.us/tools/WoodCite/.
CONTENTS

1. Preface ....................................................................................................1

2. Introduction to Product Costing ...............................................................2

3. Types of Product Costing Practices .........................................................3

 3.1. Traditional Cost Accounting ..............................................................6

3.2. Activity-based Cost Accounting........................................................8

3.3. Throughput Accounting....................................................................8

3.4. Lean Accounting..............................................................................9

3.5. Selecting the Best Product Costing System.....................................9

4. Results of the 2010 Product Costing Survey ......................................... 11

4.1. Company Characteristics ............................................................... 11

4.2. Survey Results ..............................................................................12

4.3. Discussion .....................................................................................19

5. WoodCite 1.0 - Product Costing Software Package...............................23

6. WoodCite 1.0 - Product Costing Example..............................................24

References ...................................................................................................29

Product Costing Guide for Wood Dimension and Component Manufacturers General Technical Report NRS-140
Disclosure

Selected parts of this manuscript were originally published in contributions to the following 

journals and are reprinted with permission:

Andersch, Adrienn; Buehlmann, Urs; Wiedenbeck, Jan; Lawser, Steve. 2013. Status 

and opportunities associated with product costing strategies in wood component 

manufacturing. Forest Science. 59(6): 623-636.

Andersch, Adrienn; Buehlmann, Urs; Palmer, Jeff; Wiedenbeck, Janice K.; Lawser, Steve. 

2013. Product costing program for wood component manufacturers. Forest Products 

Journal. 63 (7-8): 247-256.
Product Costing Guide for Wood Dimension and Component Manufacturers General Technical Report NRS-140 1

1. PREFACE

The North American hardwood dimension and components industry consists of an estimated 

1,200, mostly small, family owned businesses in the United States and Canada that generated 

shipments valued at roughly $4 billion in 2009 (Lawser 2010). Industry participants specialize 

in producing an array of customized wood products, such as edge-glued panels, solid and 

laminated squares, moldings, stair parts, cabinet doors and parts, turnings, components for 

bending, and other related products to meet the needs of the furniture, kitchen cabinet, 

building products, and other manufacturing industries. To remain profitable, the North 

American hardwood dimension and components industry must continuously adapt its business 

model to domestic and foreign competition and changing market and customer requirements 

in respect to quality, styling, performance, and costs. Furthermore, the industry has to cope 

with a changing regulatory environment. An important component of success is accurate 

estimation of product costs associated with each order. Competitive bidding is complicated by 

the fact that many products are customized and thus each bid may involve unique products 

and processes. Therefore, having an accurate and up-to-date product costing system can 

ensure the submission of winning (e.g., competitively priced but profitable) bids to potential 

customers.

This product costing guide, prepared for the hardwood dimension and components industry, 

includes five main sections:

•	 An introduction to product costing (section 2)

•	 An overview of current product costing systems (section 3)

•	 Results of a product costing survey conducted by Virginia Tech in 2010 (section 4)

•	 Introduction to the WoodCite 1.0 product costing software package (section 5)

•	 WoodCite 1.0 product costing software package example (section 6)

An introduction about product costing will be provided in section 2 to develop a common 

understanding of important accounting and financial terms used throughout this guide.

Over the last decades, cost accounting and product costing systems had to adapt to many 

changes in the manufacturing and business environment; thus, an array of new product costing 

systems have been developed. Examples include activity-based costing (ABC), throughput 

accounting (TA), and lean accounting (LA). These new costing systems were created to solve 

specific accounting and cost estimation problems. They will be discussed in section 3.

Results of a product costing survey will be presented in section 4. The product costing survey 

was conducted to assimilate cost accounting information from wood dimension and component 

manufacturers relating to type, structure, and accuracy of accounting systems used. The study 

aimed to determine how cost accounting information is used by company managers and what 

the shortcomings of existing cost accounting systems are.

A product costing software package, WoodCite, specifically created for hardwood dimension and 

component manufacturers as part of the current study, is introduced in section 5 on page 23. 
2 Product Costing Guide for Wood Dimension and Component Manufacturers General Technical Report NRS-140

WoodCite is a Microsoft® Access application that allows companies to determine product costs 

and create competitive bids. Essentially, WoodCite is a job-order-based costing system that 

assigns overhead costs to products based on labor and machine hours.

An example using real industry data will be demonstrated in section 6 to get a basic 

understanding of WoodCite and its different functions.

2. INTRODUCTION TO PRODUCT COSTING

The American Accounting Association defined accounting as “...The process of identifying, 

measuring, and communicating economic information to permit informed judgments and decisions 

by users of the information (American Accounting Association 1966, p 1).” Thus, accounting 

provides the financial and economic data of an entity (e.g., firm, organization, government 

agency, individuals) to parties that need to know such information. A meaningful accounting 

system has to identify and record all accounting transactions and measure the value of all assets 

and liabilities, revenues and expenses, and gains and losses, and then report them in the general 

ledger.

One way to classify accounting systems is based on the targeted user of the information 

collected (Fig. 1). Using this user-based nomenclature, three branches of accounting can be 

differentiated: management accounting, financial accounting, and tax accounting.

Management accounting is designed for the company’s internal users, primarily for a company’s 

managers to gain insights into financial information for planning, controlling, and evaluating 

business performance. Through its planning and controlling function, management accounting 

offers insights about the future of the company to managers. Management accounting mostly 

relies on internal financial reports but also uses more detailed, internal, nonfinancial reports. 

Examples of such reports pertain to product quality, customer and employee satisfaction, 

and worker productivity. Internal management accounting reports do not have to follow the 

generally accepted accounting principles (GAAP) and can be compiled for any period (year, 

quarter, month, week, and day) that proves useful to a company’s management.

Figure 1.—Structure of accounting.

Accounting
Product Costing Guide for Wood Dimension and Component Manufacturers General Technical Report NRS-140 3

Financial accounting is designed for external users, such as shareholders, suppliers, banks, 

government authorities, customers, and other outside parties to provide information about 

the financial state of a company. To serve its purpose of creating external reports, financial 

accounting must follow rigid principles, such as the GAAP, as well as the international financial 

reporting standards. financial accounting summarizes past financial transactions and must focus 

on completed periods (year, quarter, and month) because it provides financial data for financial 

documents like income statement, profit and loss statement, and balance sheet.

Tax accounting is designed for external parties, such as government regulatory agencies (e.g., 

the U.S. Internal Revenue Service or Canada Revenue Agency), to provide information on tax 

status and liabilities, tax deferral, preparation of personal income tax statements, and treatment 

of acquisitions or mergers. Tax reports must be created on a yearly basis and follow strict 

regulations of the Internal Revenue Code, as well as state and local laws.

Managerial, financial, and tax accounting are closely related because they all use the same 

database to collect the necessary information. This database, the cost accounting system, 

provides information about costs of activities accomplished, such as products produced, services 

provided, or departments operated. Management is responsible to ensure that all the cost 

information is captured accurately and is used properly for decision making and corrective 

actions, if necessary. Responsibilities of cost accounting include product costing, cost projection 

and budgeting, and “variance analysis” (comparing budgeted and actual amounts) to measure a 

company’s performance.

Product costing is an underlying component of cost accounting. The purpose of product 

costing is to provide accurate and up-to-date information for management regarding the costs 

of a company’s products. Product costing has an essential role in ensuring that the company’s 

products generate sufficient income to achieve the company’s goals. In addition, product 

costing provides:

•	 A cost control mechanism across businesses

•	 An optimization tool for operating and profit margins 

•	 Information for pricing decisions

•	 A basis for accounting, specifically cost accounting and inventory valuation

•	 Information to support make or buy decisions

Competitive bidding requires reliable product cost information and a carefully set offering 

price. The offering price is market-driven and determined after considering customer 

requirements, competitive offerings, the market situation, and the company’s situation. The 

profit margin is determined after evaluating the company’s product cost information, strategy, 

and internal margin expectations.

A product’s total cost consists of direct material cost, direct labor cost, and overhead cost. The 

overhead cost can be broken down into manufacturing overhead costs and non-manufacturing 

overhead costs including sales expenses and general and administrative expenses. A 2010 

product costing survey reported the cost component breakdown shown in Figure 2. These 
4 Product Costing Guide for Wood Dimension and Component Manufacturers General Technical Report NRS-140

results show that 41 percent of the product cost derives from direct material cost, 21 percent 

from direct labor cost, and 38 percent from overhead cost. The overhead costs consist of 18 

percent manufacturing overhead cost, 14 percent general and administrative expenses, and 6 

percent sales.

Product costing, an underlying discipline of cost accounting, has changed significantly since the 

1980s due to changes in the manufacturing environment. Therefore, section 3 will introduce an 

array of modern cost accounting and product costing systems.

3. TYPES OF PRODUCT COSTING PRACTICES

New manufacturing technologies, such as highly automated, computer aided, flexible, and 

integrated manufacturing systems adopted by companies over the last three decades, have 

eroded the role of labor in the manufacture of products. These investments have enabled shorter 

lead times and lower levels of work in process (WIP) and finished goods inventories, among 

other things. Besides technological advancements, new management practices such as just-intime (JIT), total quality management (TQM), and lean manufacturing have also been widely 

accepted and integrated into manufacturing processes.

Because accounting essentially is the financial reflection of a company’s activities, each change 

in the business has to be reflected in its accounting. Thus, the two systems, business activities 

and accounting, have to be synchronized because managers otherwise may lack accurate 

cost information, which can lead to erroneous decision making and, possibly, a decline in 

an organization’s competitive edge in the market. Therefore, to keep up with an altered 

manufacturing environment, an array of new accounting systems has been developed. However, 

selecting the most appropriate cost accounting and product costing system can be challenging.

Table 1 provides an overview of the structure of the four most widely used cost accounting 

systems in manufacturing industries: traditional cost accounting (the most widely used, 

“traditional” cost accounting system), activity-based cost accounting, throughput accounting, 

and lean accounting.

Figure 2.—Average distribution of 

total product costs of North American 

hardwood dimension and component 

manufacturers in 2010.

2 
Product Costing Guide for Wood Dimension and Component Manufacturers General Technical Report NRS-140 5

It is important to understand that multiple cost calculation methods exist under each 

accounting system because they were designed to deal with different business problems, e.g., 

product cost calculation, product value determination, inventory valuation, and cost control. 

The traditional cost accounting system (Table 1, column 1) differentiates three categories for 

product cost calculations, namely accumulation methods, cost control methods, and inventory 

evaluation practices. Accumulation practices include job order costing, process costing, and 

operational costing; cost control methods consist of actual costing, normal costing, and 

standard costing; inventory evaluation methods include absorption/full costing and variable/

direct/marginal costing. An activity-based cost accounting system differentiates two product 

cost calculation categories: activity-based costing and time-driven activity-based costing (Table 

1, column 2). A throughput accounting system relies on the theory of constraint costing 

practice to calculate product cost (Table 1, column 3). A lean accounting system differentiates 

two product costing practices: value stream costing and target costing (Table 1, column 4).

Each of these costing systems was created to resolve specific shortcomings of pre-existing 

costing systems. However, although a particular product costing system may resolve some 

shortcomings, it likely possesses others. Each company needs to select the system that best 

fits its needs. According to Gurowka and Lawson (2007), selecting the right product costing 

system requires constant review and evaluation of the organization’s situation following the 

methodology shown in Figure 3, while being aware of all product costing systems available.

Table 1.—The array of cost accounting and product costing practices

Traditional cost accounting

Activity-based cost 

accounting

Throughput 

accounting

Lean 

accounting

Accumulation methods

 Job order costing

 Process costing

 Operation costing

Cost control methods

 Actual costing

 Normal costing

 Standard costing

Inventory evaluation methods

 Absorption/full costing

 Variable/direct/marginal costing

Activity-based costing

Time-driven activitybased costing

Theory of constraint 

costing

Value stream costing

Target costing

Figure 3.—The organization’s evaluation process 

to select the best fitting product costing system 

according to Gurowka and Lawson (2007).
6 Product Costing Guide for Wood Dimension and Component Manufacturers General Technical Report NRS-140

The first step of the evaluation process is the environmental scan, which includes the review 

of the organization’s competitive landscape, leadership philosophy, strategic plan, technology 

platform, and budget. Then, an organizational review is called for because organizational 

size and diversity, level of centralization, product diversity, product complexity, customer 

diversity, channel diversity, and product manufacturing diversity all affect the selection of 

the most appropriate product costing system. Also, different types of organizations, such as 

manufacturing, service, nonprofit, or government organizations have different needs and 

different criteria for what constitutes their most useful product costing system. Once the 

organization has been evaluated, all available product costing systems should be reviewed and 

matched with the organization’s needs before a decision is made about which system to use.

3.1 Traditional Cost Accounting

The conventional and still most widely used product costing system, which is based on traditional 

cost accounting, was designed in the 1900s to satisfy the requirements of industrial mass 

production. In the 1900s, products made by manufacturers were homogeneous and the level of 

automation was low or nonexistent. Therefore, a relatively simple product costing system, such as 

the traditional product costing system based on cost accounting, served businesses well. Traditional 

cost accounting calculates product cost as the sum of direct material, direct labor, and all overhead 

costs, where overhead costs are allocated to products on a volume-related allocation basis, such 

as labor or machine hours. Three variants of traditional product costing systems exist. Although 

all three are based on the same principles, they can be categorized according to three different 

methods that make them more suited for different types of manufacturing. The three different 

methods are accumulation methods, cost control methods, and inventory evaluation methods.

Accumulation Methods

•	 The job order costing system is suitable for companies producing a wide variety 

of products. This system is used by businesses in which the product is tailored for a 

particular customer, such as customized furniture, aircraft, printing, construction, law, 

and accounting. The job cost sheet is prepared for each job to display the material, 

labor, and overhead used on each job. Once the order is complete, the total cost of the 

sheet is compared to the price charged to find the gross margin for the job.

•	 The process costing system is preferred when large masses of homogeneous products 

are produced, such as chemicals, paper, cement, rubber, steel, beverage, and glass. In the 

process costing system, the cost of the product is traced as it proceeds from one process 

to another. The heart of the system is the production report, which is usually prepared 

on a monthly basis.

•	 The third type of cost accumulating systems is a hybrid version of the previous two, 

called the operation costing system. This system is used by manufacturers whose 

processes contain some repetitive process steps through which all units go, yet batches 

of products are still tailored to specific orders. An automobile manufacturer is a typical 

example of such a mass producer where processes such as body forming, painting, and 

assembly are the same in each case, but different paint may be used for different cars. In 

the operation costing system, a work order sheet is used to trace a batch of products as 

it goes through the various process steps.
Product Costing Guide for Wood Dimension and Component Manufacturers General Technical Report NRS-140 7

Cost Control Methods

•	 The actual costing system measures all cost components—direct material, direct labor, 

and manufacturing overhead—at their actual values to calculate product cost. Actual 

costs provide reliable and current cost information, but are not available immediately 

when a given product is manufactured because overhead costs are unknown until all 

bills are received and accounted for.

•	 The normal costing system measures direct material and direct labor costs at their 

actual values but uses predetermined overhead rates with an actual allocation base based 

on past data to calculate the product cost. In general, it is agreed that using normal 

costing systems is a reasonable compromise between real costs incurred (which will not 

be known for some time) and estimated costs (which are based on historical experience) 

because normal costing uses estimates only for overhead costs.

•	 The standard costing system allocates all cost elements based on a standard allocation 

base for the predetermined overhead rate instead of using the actual costs of direct 

material and direct labor, and estimates of overhead costs. This means that the cost 

of goods sold reflects the standard costs, not the actual costs of a product. However, 

because there is often a difference between the actual cost and the standard cost, the 

costing system has to account for the difference. This difference is called a variance. If 

the actual cost is greater than the standard costs, the variance is unfavorable, and the 

company’s actual profits will be less than planned. If the actual cost is less than the 

standard cost, the variance is favorable, and the company’s actual profit will be more 

than planned.

Inventory Evaluation Methods

•	 Absorption or “full” costing implies that all costs of production are absorbed by 

the products manufactured. Under absorption costing, all costs of production (direct 

material, direct labor, and manufacturing overhead costs) are considered product 

costs and included in inventory. Thus, when the company sells a product, the cost of 

inventory will be transferred to cost of goods sold and the gross profit will be reduced 

by all costs of production, regardless of whether they are fixed or variable. Costs 

that increase as volume increases are known as variable costs, while costs that do not 

increase with reasonable increases in volume are known as fixed costs. The advantage 

of this costing method is that the product is measured and reported on its full cost; the 

disadvantage can be that this method may not lead to the best decision on how to price 

or discount a product because the cost-volume-profit relationship is ignored.

•	 Variable costing—referred to sometimes as direct costing or marginal costing—means 

that only variable costs of production are included in inventory and in cost of goods 

sold. Excluding fixed costs ignores profits resulting from inventory buildup instead of 

sales. Therefore, variable costing helps prevent overproduction so managers can have a 

better understanding of their performance. However, variable costing can be misleading 

when sales revenues are greater than production costs or vice versa, because higher 

profits may mislead management into taking improper action. Therefore, variable 

costing can be used internally, but not for financial reporting.
8 Product Costing Guide for Wood Dimension and Component Manufacturers General Technical Report NRS-140

3.2 Activity-based Cost Accounting

Activity-based cost (ABC) accounting was developed in the 1970s in response to the growing 

complexity of the manufacturing environment due to increasing product variability, changing 

production methods, and automation. Therefore, ABC accounting was designed to be applicable 

for any kind of organization regardless of product type (homogeneous or heterogeneous), 

production type, and level of automation. The concept behind ABC accounting is that making 

a product requires a series of activities that create costs. Therefore, in ABC accounting, product 

cost is calculated as a sum of direct material, direct labor, and overhead costs, where overhead 

costs are allocated based on activity and duration.

•	 In ABC accounting the allocation process happens in two steps. In the first step, costs 

of resources are assigned to activities (e.g., material purchasing, production preparation, 

material handling, quality assurance, customer contact) based on a cost driver (e.g., 

administration, depreciation, rent and utilities, office supplies, transportation, business 

travel). Then, costs of activities are allocated to individual products based on a given 

product’s consumption of “activities.”

•	 In 2003, Kaplan and Anderson introduced an updated version of ABC, called timedriven ABC, which puts greater emphasis on process efficiency and capacity utilization. 

In contrast to ABC, time-driven ABC at first estimates two parameters—units of time 

required to perform an activity and the cost per unit of time—and then multiplies this 

information by the quantity of the product. Estimation inaccuracies are revealed in 

unexpected surpluses or resource shortages, which allow analysts to adjust unit time 

required to perform certain activities. If managers aim to use the system for strategic 

decision making, rough estimates (+/- 10 percent) should be adequate. However, for 

operational control, resource requirements, quality, and cycle times of activities should 

be closely monitored to encourage continuous improvement activities.

3.3 Throughput Accounting

Throughput accounting (TA) was developed in the 1980s as another alternative to the traditional 

cost accounting system. TA was designed primarily for a production system that has low overhead 

and labor costs, e.g., for homogeneous and heterogeneous products with high material costs and 

different levels of automation. In TA, throughput is calculated based on direct material cost and 

operating expenses, but TA does not allocate overhead costs to products and services.

Throughput accounting aims to increase accuracy in product cost estimation by measuring 

throughput, inventory, and operating expenses.

•	 Throughput is defined as the revenue generated by the company from products sold. 

It focuses on sold products because unsold products do not create revenue. Therefore, 

products in work-in-process (WIP) and finished goods inventory do not count as 

throughput. This ensures that the capacity on a constrained resource (e.g., a bottleneck) 

is not wasted on overproduction.

•	 Inventory is viewed as money tied up in the company thereby decreasing the 

performance of the system. Thus, inventory is a liability that should be reduced 

gradually as it hides problems and decreases company performance.
Product Costing Guide for Wood Dimension and Component Manufacturers General Technical Report NRS-140 9

•	 Operating expenses include all the money the company spends for turning inventory 

into throughput. It contains direct labor, manufacturing overhead, and selling and 

administrative costs, which are treated as period expenses and are not allocated to 

products. Operating expenses incurred in a period must be covered by the throughput 

generated by the system. If the throughput of the company cannot cover period 

operating expenses, operations will eventually cease.

3.4 Lean Accounting

Lean accounting (LA) is the most recent cost accounting practice introduced (2000 and later). 

LA is designed to handle mixed models of production, heterogeneous products with high 

variety, and high levels of automation. In LA, all costs are traced directly to the value stream 

of a product; overhead allocation is minimal and is, most frequently, based on square footage 

of the space occupied by a given value stream. LA offers two product costing practices: value 

stream costing (VSC) and target costing (TC).

•	 Lean accounting uses a single cost collector, called a value stream. A value stream 

combines all activities involved in the production of a product from its inception to 

the ultimate delivery to the customer, including design, manufacturing, transportation, 

and money collection. In value stream costing (VSC), costs are calculated biweekly or 

monthly for each value stream. Both direct and (traditional) indirect costs are included 

in the cost calculation, with costs outside of a given value stream excluded. In the 

first step, VSC assigns all costs (e.g., labor, material, support services, and facilities) of 

a given time period to cost pools of each value stream. Cost pools can be defined as 

groups of associated costs that relate to a specific value stream. In the second step, the 

accumulated costs in each cost pool are assigned weekly as direct costs to individual 

value streams. Up to 90 percent of the costs can thus be directly assigned to products 

and only a small fraction of overhead cost needs to be allocated on a distribution basis 

such as square footage or materials used.

•	 Target Costing (TC) focuses on cost reduction beginning at the planning and design 

stage of the product development process and applies it through the product’s entire 

life cycle. Target costing enables companies to determine a more realistic price, improve 

quality, and create increased value for the customer for its products. Target costing 

was originally created to provide a better understanding of customer requirements at 

the earliest possible stage in a product’s life cycle. In a lean environment, target costing 

is primarily used when a company wants to introduce a new value stream or wants to 

add a new product to an existing value stream. Target costing enables a company to 

maximize the value of a new product and achieve maximum profitability for a given 

value stream.

3.5 Selecting the Best Product Costing System

In the previous sections, the array of traditional and alternative cost accounting and associated 

product costing systems were introduced. Further information about strengths and weaknesses, 

and benefits and drawbacks of each of these systems are available in the literature. However, 

no real framework exists for guidance in how to select the best product costing system. Yet, 

without having the best product costing system in place, industry participants cannot accurately 
10 Product Costing Guide for Wood Dimension and Component Manufacturers General Technical Report NRS-140

calculate their products’ costs to ensure profitability and submit winning bids to potential 

customers. Also, and maybe even more challenging, bids from competitors with inaccurate 

costing data can underprice more realistic bids, thereby hurting the industry in the long term.

Respondents to the 2010 Product Costing Survey indicated that the characteristics that 

would add the most value to their product costing systems were (listed in order of frequency 

mentioned): 

•	 easy to operate

•	 provide accurate cost information for management purposes

•	 provide easily available, up-to-date information for cost estimates

•	 easily accessible

•	 easily customizable

Additional characteristics mentioned as desirable attributes of a costing system included:

•	 build custom reports

•	 display historical unit cuts and trends

•	 handle multiusers

•	 not time consuming to maintain

Selecting the “best” product costing system requires constant review and evaluation of an 

organization’s situation and a continuous review of the available product costing practices 

(Gurowka and Lawson 2007). Empirical evidence exists that indicates most companies 

competing in the hardwood dimension and component industry use traditional costing systems 

to calculate product costs. This information is confirmed by the respondents of the 2010 

Product Costing Survey, in which 74 percent of the respondents reported using a traditional 

cost accounting system, 13 percent use an activity-based cost accounting system, 4 percent use 

a lean accounting system, and 9 percent use their own, unspecified setup. Thus, traditional cost 

accounting systems are the most frequently used, although it has been shown that traditional 

cost accounting systems distort data on product cost, potentially leading to erroneous decision 

making. Management accountants in the U.S. advocate using activity-based cost accounting 

as an alternative system for product cost calculation. However, numerous companies have 

experimented with ABC accounting and then abandoned the method because it is expensive 

to validate time allocations and difficult to maintain and update the ABC accounting system. 

Also, many industry practitioners reject throughput accounting and its underlying discipline 

of direct costing because the variable portion of direct costing tends to decrease in today’s 

flexible manufacturing making material costs the only variable cost in direct costing. Companies 

applying lean principles may use a lean accounting system; however, a lean accounting system 

requires establishing value streams that consist of product families following similar process 

sequences through a company’s operation.
Product Costing Guide for Wood Dimension and Component Manufacturers General Technical Report NRS-140 11

4. RESULTS OF THE 2010 PRODUCT COSTING SURVEY

In 2010, a survey study was conducted by Virginia Tech with the support of the Wood 

Component Manufacturers Association (WCMA) to investigate the type and structure of 

product costing practices used by the North American hardwood dimension and components 

industry. The survey was mailed to a subset of the North American hardwood dimension and 

component industry. It asked exploratory questions about the type, structure, and reliability 

of the costing systems used; the purpose of the current versus an imaginary “perfect” costing 

system; and problems of the current costing system. The survey also asked about ideas for 

improving the industry’s costing systems. The questionnaire consisted of 34 questions: 9 

questions related to company information, 15 questions related to the characteristics of product 

costing systems, and 10 questions addressed products and markets.

An address list of all members of the WCMA containing 137 companies and a second list of 

contact data for 232 non-member firms operating in the hardwood components production 

sector were obtained from the WCMA (WCMA 2010). Additionally, the membership list 

of the Wood Product Manufacturers Association (WPMA 2010) containing 114 companies 

was used; 45 of these companies were already listed on one of the previous two databases and 

thus were removed, yielding a total of 69 additional companies from the WPMA list. Finally, 

addresses for 57 millwork companies were obtained from the 2009 Virginia Industry Directory 

(Harris Infosource 2009) and from manta.com., an online industry directory (Manta 2010). 

Thus, the survey database contained a total of 495 addresses of North American hardwood 

dimension and components producers, 447 in the United States and 48 in Canada.

The final version of the questionnaire, which was identical for all survey participants, was sent 

to 490 companies (excluding five pretested respondents) during the summer of 2010. The 

survey was addressed to a senior company manager, preferably the CEO, the President, or the 

owner. From the initial contact list, 7 companies refused to participate in the research and an 

additional 37 surveys could not be delivered due to the businesses being closed or an address 

discrepancy. Thus, the adjusted survey population was 451. During the 8-week-long duration of 

the survey, 74 valid responses were received, for a response rate of 16 percent. However, because 

not all questions were answered by all respondents, the number of responses obtained for a 

given question varied.

4.1 Company Characteristics

Wood dimension and components manufacturing is not separated as an individual category 

under the North American Industry Classification System (U.S. Census Bureau 2010b), 

but is folded into other industry subsegments. According to survey respondents, 43 percent 

classified their business activity as millwork manufacturing (NAICS 32191), 12 percent as 

kitchen, bath cabinet, or countertop manufacturing (NAICS 33711), 11 percent as household 

and institutional furniture manufacturing (NAICS 33712), 7 percent as sawmill and wood 

preservation manufacturing (NAICS 32111), 1 percent as veneer manufacturing (NAICS 

32121), 1 percent as office furniture (including fixtures, NAICS 33721); and 24 percent as 

“other” (NAICS 32199). The “other” category included 12 component manufacturers, 3 

wholesalers, and 3 art and design companies.
12 Product Costing Guide for Wood Dimension and Component Manufacturers General Technical Report NRS-140

The majority of respondents, 72 percent, ran a manufacturing business, 23 percent were 

in trading or brokering, and 5 percent were involved in both activities. Most respondents’ 

companies belonged to the micro (<10 employees) and small (<50 employees) company 

categories (European Commission 2003) based on their number of employees reported. Thirty 

respondents (41 percent) reported having fewer than 20 employees, 21 respondents (28 percent) 

employed between 20 and 49 individuals, 14 respondents (19 percent) employed between 50 

and 99 individuals, and the remaining 9 respondents (12 percent) reported having more than 

100 but fewer than 499 employees. These results are similar to the average company size in the 

U.S. millwork industry in 2009 as reported by the U.S. Bureau of Labor Statistics (U.S. Bureau 

of Labor Statistics 2010).

Seventeen companies (24 percent) reported total annual wood products sales volume in 2009 

to be between $5.1 million and $10 million, 15 companies (21 percent) reported between $2.1 

million and $5 million, 14 companies (19 percent) reported less than $1 million, 12 companies 

(17 percent) between $1.1 million and $2 million, and 14 companies (19 percent) reported 

above $10.1 million total annual wood products sales volume. For 2007, the U.S. Census 

Bureau (U.S. Census Bureau 2010a) reported an average sales volume of $5.9 million for the 

U.S. millwork industry. Eighty-five percent of respondents reported that their total annual 

wood products sales volume in 2009 was smaller than in 2006, before the recession. Seven 

percent stated that their sales volume was the same in 2009 compared to 2006, and only 8 

percent of the respondents reported increases in sales volume.

Most responses were received from the Midwest (31 percent) followed by facilities located in the 

Northeast (30 percent), the South (27 percent), and the West (5 percent). Seven percent of the 

responses were received from Canada.

Results from this mail survey have limitations that must be considered when reading, interpreting, 

and applying the results (Alreck and Settle 2003). Likely, only one respondent from each company 

(although likely a member of the senior management team) was contacted to answer the survey, 

possibly creating single response bias (Blair and Burton 1987). Also, respondents may have 

different perspectives of, and motives for, a costing system either as users or preparers. Thus, 

findings reported may be biased based on these differences in perspectives. Because the majority 

(68 percent) of the respondents were owners or CEOs of the company, their involvement 

in and knowledge of current product costing practices may be limited. In these cases, the 

respondent might have obtained input from a company expert to answer the questions specific to 

the product costing system. Also, as only a subset of the industry was contacted for this survey, 

results cannot be generalized beyond the targeted industry segments. Finally, results may have 

been affected by the severe recession impacting the industry during the period in which the 

survey was conducted. Also, the relatively low number of respondents (response rate 16 percent) 

warrants caution when generalizing the results reported from this study.

4.2 Survey Results

First, the cost accounting and product costing systems currently used by North American 

hardwood dimension and components manufacturers are described and the purpose of these 

systems is given. Then, problems that arise from the use of these systems are discussed. And 
Product Costing Guide for Wood Dimension and Component Manufacturers General Technical Report NRS-140 13

finally, characteristics of a “perfect” system are listed and systems improvements are addressed. 

Non-parametric tests were conducted among responses by company size and main product 

category to detect significant differences between respondents (a = 0.05).

Figure 4 provides an overview of the average distribution of total product costs of responding 

companies active in the North American hardwood dimension and components industry. 

Survey results show that 41 percent of the product cost derives from direct material cost and 

21 percent from direct labor cost. Manufacturing overhead cost, e.g., utilities, health insurance, 

and property tax, among others, represents 18 percent of the total average product cost. General 

and administrative expenses (e.g., travel expenses, executive salaries, and general support and 

associated taxes among others) cover 14 percent, while sales expenses make up 6 percent of 

the total average product cost. The Kruskal-Wallis test performed did not indicate significant 

differences in the distribution of total product costs of responding companies by company size 

or by main product category. Half of the respondents reported that they calculated overhead 

cost on a monthly basis, 26 percent calculated overhead cost on an annual basis, and 14 percent 

indicated that they calculated overhead costs infrequently (mostly quarterly). Ten percent of the 

respondents stated that they calculated their overhead costs weekly.

Survey participants were asked to categorize the information their current costing system 

gives them and to indicate what a “perfect” system would provide. Results shown in Figure 5 

illustrate that the vast majority of respondents gather financial information from their current 

costing system (average overall response rate in the financial information category [current] is 

70 percent, 49 responses divided by 70 respondents, Fig. 5). Respondents use this financial 

information to create financial reports (current system, 84 percent, Fig. 5), tax reports (67 

percent), and inventory valuations (69 percent), and to calculate the cost of their products (60 

percent).

A smaller proportion of firms indicated that they use their cost accounting system to gain 

operational information in support of their operational decision making (average overall 

response rate in the operational information category [current] is 24 percent, Fig. 5). 

Respondents use this operational information to prepare performance indicators (current 

Figure 4.—Average distribution of 

total product costs of North American 

hardwood dimension and component 

manufacturers in 2010 (n=64).

4 
14 Product Costing Guide for Wood Dimension and Component Manufacturers General Technical Report NRS-140

system, 33 percent), define and measure value-added and nonvalue added processes (22 

percent), improve processes (13 percent), and measure quality (24 percent).

Respondents indicated they use their current cost accounting system for strategic information 

with about the same frequency as they use it for operational information (average overall 

response rate in the strategic information category [current] is 28 percent, 19 responses divided 

by 68 respondents, Fig. 5). Respondents use this strategic information to calculate target cost 

(current system, 46 percent), justify investment decisions (21 percent), calculate life cycle cost 

(13 percent), and come to make or buy decisions (31 percent).

Most respondents believe that a “perfect” costing system should meet, first and foremost, 

the financial information needs of the organization. The “perfect” system, according to the 

respondents to this question, should provide operational information more effectively than do 

current systems. Respondents would also like to use this operational information to prepare 

performance indicators (82 percent), define and measure value-added and nonvalue added 

processes (78 percent), measure quality (78 percent), and improve processes (75 percent). 

Respondents also indicated that the “perfect” system should provide strategic information (72 

percent, Fig. 5). Respondents would like to use this strategic information to calculate target 

cost (85 percent), come to make or buy decisions (75 percent), justify investment decisions (69 

percent), and calculate life cycle cost (57 percent).

Survey participants were also asked what type of cost accounting system they are using 

(Fig. 6). A total of 68 responses were received for this question. Seventy-four percent of 

respondents reported using a traditional cost accounting system; 13 percent an activity-based 

Figure 5.—Information provided by respondent company’s current costing system and preferences for 

capabilities of the “perfect” costing system.

5 
Product Costing Guide for Wood Dimension and Component Manufacturers General Technical Report NRS-140 15

Figure 6.—Type of cost accounting 

system used by problem type and by 

respondents (n=68).

cost accounting system; 4 percent a lean accounting system; while 9 percent use their own, 

unspecified setup. The Kruskal-Wallis test did not show any significant differences in the type of 

costing systems used by responding companies by company size or by main product category.

Related to their current costing system, survey participants were asked, “Have you ever realized 

that high volume products carry too much of the overhead burden and become over-priced 

while the low volume products are underpriced?” (Fig. 7a). Forty-six percent of the respondents) 

using a traditional cost accounting system experienced this problem, while 67 percent of the 

respondents that claimed to have an ABC system identified the same problem. Thirty-three 

percent of the respondents with a lean accounting system reported the same issue and 67 percent 

of the respondents with their own setup indicated that high-volume products often carry a 

disproportionately high overhead burden.

Next, participants were asked, “Do you think that your costing process (in general) is too expensive 

and/or too time-consuming?” (Fig. 7b). Thirty-two percent of the traditional cost accounting 

users, 44 percent of the ABC users, and 50 percent of the respondents using their own costing 

setup indicated that their costing process is too expensive and/or too time-consuming to 

maintain. Zero percent of the lean accounting users perceived this issue to be a problem.

The results to the last question of this section, “Do you use visual performance measures (e.g., 

hourly production, days of inventory, operational equipment efficiency, etc.) on a performance 

board on the shop floor?” are shown in Figure 7c. Forty percent of traditional cost accounting 

users apply performance measures on the shop floor, 44 percent of ABC users, 100 percent of 

the lean accounting users, and 50 percent of the respondents with their own system do so.

A total of 72 respondents expressed their opinion on the reliability of their costing system. 

Eleven percent claimed that their costing system provides “outstanding” information (Fig. 8). 

Thirty-nine percent of the participants rated the information provided by their costing system as 

“good,” 24 percent of respondents rated it as “adequate,” 24 percent indicated the information 

provided by their costing system “needs improvements,” and 3 percent rated the information 

provided as “poor.”

6 
16 Product Costing Guide for Wood Dimension and Component Manufacturers General Technical Report NRS-140

Figure 8.—Respondents’ ratings of the 

quality of the information provided by their 

costing system (n=72).

Figure 7a.—Percentage of respondents 

indicating that there have been times 

when high volume products have been 

found to carry too much of the overhead 

burden and therefore were overpriced, 

by accounting system employed.

Figure 7b.—Percentage of respondents 

indicating they believe their costing 

process (in general) is too expensive 

and/or too time-consuming.

Figure 7c.—Percentage of respondents 

indicating they use visual performance 

measures (e.g., hourly production, 

days of inventory, operational 

equipment efficiency, etc.) on a 

performance board on the shop floor.
Product Costing Guide for Wood Dimension and Component Manufacturers General Technical Report NRS-140 17

Figure 9.—Problems of respondents’ costing systems (error bar depicts +/- 1 standard deviation).

Respondents were also asked whether they experienced problems arising from erroneous 

information provided by their costing systems. A total of 71 respondents answered this 

question. Six percent of the respondents reported that this issue arises frequently, 77 percent of 

the respondents claimed that it happens occasionally, while 17 percent of the respondents stated 

that they never experienced the problem.

Results show that even respondents who indicated high levels of satisfaction with their costing 

system (e.g., respondents who rated their costing system as “outstanding” or “good”) reported 

occasional problems stemming from erroneous information provided by their system. However, 

only respondents from the three rankings indicating the lowest level of satisfaction—e.g., 

“adequate,” “needs improvement,” and “poor”—stated that problems frequently arise from 

erroneous information provided by their costing systems. Interestingly, 3 out of the 17 

respondents who reported that their costing system needs improvement also reported that they 

never have problems arising from erroneous information provided by their costing systems.

To gain a deeper understanding of the challenges that respondents face with their costing 

systems, respondents were asked to provide more details about any problems associated with 

their system. Results are shown in Figure 9.

The five highest rated problems were “lack of resources” (average response of 3.08 on a scale 

from 1 [never occurs], 3 [seldom occurs], to 5 [always occurs]), “no link to other management 

initiatives” (3.07), “no interface to enterprise software” (2.78), “failure to understand the three 

(financial, operational, strategic) uses of costing system” (2.77), and “lack of data” (2.76). 

Respondents also could indicate “Other” options in the questionnaire to list problems that 

were not mentioned in the original table. Respondents listed the following additional problems 

they encounter with their systems: “human error typing data in,” “product costing is not part 

of the accounting system,” “regulations (local, federal),” “redundancy,” and “managers do not 
18 Product Costing Guide for Wood Dimension and Component Manufacturers General Technical Report NRS-140

use the data.” Results showed that significantly more companies in the size group of 50 to 99 

employees tend to complain about “redundant data” than do companies with 1 to 19 employees 

or companies with 20 to 49 employees. Also, significantly more companies in the size group 

of 50 to 99 employees tend to complain about “erroneous data” than do companies with 1 to 

19 employees). Moreover, significantly more companies in the group of 50 to 99 employees 

complained about a “lack of data” than did companies with 20 to 49 employees or companies 

with more than 100 employees. Additionally, results also showed that significantly more 

sawmills and wood preservative manufacturers reported problems arising from “no interface 

to enterprise software” than did veneer/plywood/engineered wood products manufacturers or 

millwork manufacturers.

Survey participants were asked to provide their insights on which objectives of a costing system 

are the most important. Participants also were asked to compare their desired objectives to 

objectives that their current costing system already possesses. Responses received for each 

question are illustrated in Figure 10 (important objectives of a costing system) and Figure 11 

(comparison of desired and existing objectives of the participants’ systems), respectively.

The five highest rated objectives of a desired costing system were “easy to operate” (average 

response of 4.52 on a Likert-scale from 1 (not important), 3 (moderately important), to 5 (very 

important)), “provide accurate cost information for management purposes” (4.44), “provide 

easily available, up-to-date information for cost estimates” (4.38), “easily accessible” (4.36), 

and “easily customizable” (4.30). An “Other” option was also provided for respondents where 

participants were able to list what kind of objectives they believe would add the most value to a 

costing system. Respondents listed the following additional objectives: “build custom reports,” 

“display historical unit cuts and trends,” “handle multiusers,” and “not time consuming to 

maintain.”

Figure 10.—Costing system objectives important to respondents (error bar depicts +/- 1 standard 

deviation).
Product Costing Guide for Wood Dimension and Component Manufacturers General Technical Report NRS-140 19

Respondents were also asked to indicate which objectives they believed were being met by 

their existing costing software on a three point scale: 1 (not met), 2 (partially met), and 3 (fully 

met; Fig. 11). The five objectives that respondents felt were being best met by their current 

costing systems were “easily accessible” (average response 2.44), “inexpensive to buy” (2.35), 

“maintenance cost is low” (2.31), “be an individual system” (2.29), and “easy to operate” 

(2.27).

4.3 Discussion

Traditional cost accounting systems were developed at the beginning of the 20th century when 

mass production had revolutionized human society’s productive capacities, labor costs were 

cheap and stable for long periods, and labor efficiency and machine utilization rates were the 

focus of managements’ attention (Carnes and Hedin 2005, Plossl 1990). During this time, 

technological development was slow and major design changes were unusual, which allowed 

for long product cycles and setup times (Plossl 1990). In the 1960s, direct labor from mainly 

low-skilled workers made up approximately 25 percent of the total product costs; overhead 

costs were also relatively small (25 percent) and closely related to direct labor (Plossl 1990). 

Thus, distortions arising from inappropriate overhead allocations were not substantial. Today, 

companies produce a wide range of customized products, labor cost represents a smaller part of 

total costs, and overhead costs play a more considerable role.

This research shows a decreasing trend of labor costs, which now make up 21 percent of total 

costs on average of all respondents (Fig. 4). The Wood Component Manufacturers Association’s 

cost of doing business survey conducted in 2009 (WCMA 2009) reflects the decreasing 

importance of direct labor cost even more: 60 percent direct material cost (vs. 41% here), 12 

percent direct labor cost (vs. 21 percent here), 14 percent manufacturing overhead cost (vs. 

18 percent 9 percent general and administrative expenses (vs. 14 percent), and 5 percent sales 

expenses (vs. 6 percent from this survey). Although these differences cannot be unambiguously 

explained with the information available, such differences can arise when cost data from a 

wide variety of companies are collected. Different products carry different cost allocations. For 

Figure 11.—Objectives of costing software respondents believe are being met by their existing 

costing software (error bar depicts +/- 1 standard deviation).

13
20 Product Costing Guide for Wood Dimension and Component Manufacturers General Technical Report NRS-140

example, companies producing low value-added products typically have higher direct material 

costs and lower labor costs as a percentage of total costs than companies producing higher 

value-added products. As an example, a company producing custom-made, high-end solid 

hardwood furniture doors incurs higher labor costs as part of its total cost as compared to a 

company producing solid hardwood blanks for use in the manufacture of upholstered furniture. 

Therefore, the difference in the distribution of costs can be explained by the differing products 

that respondents of the two studies produce.

The purpose of cost accounting systems is to provide financial, operational, and strategic 

information for decision makers (Player and Keys 1997). Satisfying all three purposes is 

difficult for a single system because different levels of aggregation, reporting frequency, and 

measures are required. For instance, for financial reporting requirements, it may not be 

necessary to accurately measure resources consumed by individual products, but for strategic 

decision making, accurate product costs are necessary to distinguish between profitable and 

unprofitable products and activities. Survey results show that respondents are using their cost 

accounting system primarily to gain financial information instead of gaining information for 

management or strategic decision purposes. This finding is somewhat surprising, because basic 

financial data can be obtained from basic accounting systems. However, a way to address the 

need for more operational information from an accounting system is the use of lean accounting 

(Crandall and Main 2007; Maskell and Baggaley 2003a,b). Lean accounting uses information 

generated from the shop floor on a frequent basis, e.g., by the day, and often, by the hour. 

Lean accounting performs costing, variable reporting, overhead allocation, and budgeting at 

the value stream level (Maskell and Baggaley 2003), providing accurate, real-time operational 

information. If lean accounting is aligned with lean practices, waste from all financial and nonfinancial transactions can be removed by applying visual tools, lean trainings, and employee 

empowerment. Also, respondents, especially those in the household, institutional, and office 

furniture categories, underlined the importance of target costing to gain strategic information. 

Although target costing is a powerful profit and cost management practice that fits with lean 

accounting (Maskell and Baggaley 2003a,b), target costing is primarily adopted for product 

development and design processes, rather than accounting (Dekker and Smidt 2003).

Indeed, numerous cost accounting systems can serve all three purposes (financial, operational, 

and strategic). However, no cost accounting system can serve all three purposes equally well 

because of the partially conflicting requirements of different users (e.g., financial controllers, 

line managers, and strategic planners), purposes (e.g., financial accounting, activity analysis 

for process improvement, and make or buy analysis), levels of aggregation (e.g., company 

wide data, detailed data, and plant or product line aggregation data), reporting frequency 

(e.g., periodic, immediate, and ad hoc), and types of measures (e.g., financial, physical, or 

both, Player and Keys 1997). Because each choice involves tradeoffs, businesses need to clearly 

understand how they will use the information from their cost accounting system to be able to 

lay out their system to serve their most critical purposes best.

A majority of respondents (74 percent) reported using a traditional cost accounting system 

rather than its newer substitutes, such as ABC accounting (13 percent), lean accounting 

(4 percent), throughput accounting, or their own setup (9 percent). Given that most U.S. 
Product Costing Guide for Wood Dimension and Component Manufacturers General Technical Report NRS-140 21

accountants and managers have been educated to use traditional volume-based cost accounting 

systems that use either machine hours or direct labor hours as an allocation base, it is likely 

that the proprietary systems reported by 9 percent of respondents (e.g., “own setup”) are built 

according to traditional cost accounting philosophy. The high rate of use of traditional cost 

accounting practices may also be a function of the size of responding companies. Because 

most responding companies are small (88 percent of respondents report to have less than 100 

employees), they are unlikely to invest in sophisticated or unfamiliar costing systems.

A frequent critique of traditional cost accounting systems is that these systems do not accurately 

allocate all costs to individual products because high volume products carry too much of the 

overhead burden and become overpriced while low volume products are underpriced (Johnson 

and Kaplan 1987). Survey participants were asked to provide feedback on whether they 

faced this particular problem with their costing system. Yet, only 23 out of 50 respondents 

(46 percent) who reported to have a traditional cost accounting system indicated they have 

this cost allocation problem. This number appears low given that experts consistently claim 

that this misallocation problem is the central weakness of traditional cost accounting systems 

(Berliner and Brimson 1988, Cokins and Hicks 2007, Goldratt and Cox 1986, Johnson and 

Kaplan 1987). However, defenders of traditional cost accounting systems maintain that these 

methods may not significantly distort information provided for decision makers because many 

volume-related measures of output (e.g., direct labor, machines) are highly correlated with 

manufacturing overhead (Drury and Tayles 1994). Because four out of six companies who 

reportedly use their own setup (67 percent) reported the same problem, we speculate that the 

proprietary cost accounting systems of these companies are based on traditional cost accounting 

principles. However, six out of the nine respondents (67 percent) who indicated having an ABC 

accounting system also described the cost allocation problem. Because ABC accounting systems 

were specifically designed to eliminate this problem, suspicions exist that respondents may not 

have implemented or are not using their ABC system properly.

The most severe critique of activity-based costing systems, as discussed in the literature, is that 

the costing process (in general) is too expensive or too time-consuming (Roztocki et al. 2004). 

However, our study found that 16 out of the 50 traditional cost accounting users (32 percent) 

responding to our survey also faced this issue, which is surprising because traditional costing 

systems are considered to be the simplest and easiest to maintain. Only four out of nine ABC 

users (44 percent) reported the same problem. No respondents using lean accounting indicated 

that their system is expensive or time consuming, while three out of six respondents (50 

percent) with their own setup mentioned the problem.

Survey participants were asked whether they use visual performance measures (e.g., hourly 

production, days of inventory, or operational equipment efficiency) on a performance board on 

the shop floor, which is one of the traits of a lean company (Parry and Turner 2006). However, 

our survey found that visual performance measures are widely used by companies with a variety 

of cost accounting systems and are not restricted to lean companies.

A survey conducted by Howell et al. in 1987 about management accounting in the changing 

manufacturing environment indicated that 54 percent of respondents were unsatisfied with 
22 Product Costing Guide for Wood Dimension and Component Manufacturers General Technical Report NRS-140

their product costing system (Drury and Tayles 1994). Today, a wide range of cost accounting 

systems and product costing practices are available for industry participants and improvements 

to existing systems have been made. However, 27 percent of survey respondents still indicated 

that they were unsatisfied with their product costing system (Fig. 8). Furthermore, only 23 

percent of respondents reported that they obtain adequate information from their costing 

system (Fig. 8). Another noteworthy observation is that all respondents who rated the 

information obtained from their product costing system as “outstanding” (11 percent, Fig. 

8) had a traditional system. These results suggest that traditional cost accounting systems can 

be useful and adequate if they are properly designed while newer systems, such as ABC or 

lean accounting systems, can provide misleading and unreliable data if they are not correctly 

implemented and/or used.

Problems with costing systems used can be classified into three categories; management 

related problems, people related problems, and costing systems related problems. The most 

often cited problem was “lack of resources” (Fig. 9). Most cost accounting systems require 

significant investments for software packages, outside expertise, and employee training, as 

well as considerable efforts to maintain the system’s data. Thus, the balance between resources 

invested in cost accounting systems and the quality and extent of the information provided by 

the system is always challenging.

The second most common problem mentioned by respondents was “no link to management 

initiatives.” This problem can be categorized as a costing system related problem (Fig. 9). It is 

expected that this problem is at least partially attributable to companies’ costing systems having 

been created to provide information not exactly targeted at what management needs.

The third most common problem listed by the respondents was “no interface to enterprise 

software” (Fig. 9). Today, cost accounting systems are doomed to fall short of their optimal 

utility if implemented in isolation. Linkage to other enterprise software and management 

initiatives, such as enterprise resource planning (ERP) systems, provide valuable cost 

information with the largest positive impact. Such links are essential because cost information 

provided by the cost accounting system can encourage or discourage actions related to other 

enterprise software and management initiatives.

Although respondents indicated that the objectives of easy accessibility and low cost were 

being met by their current systems (Fig. 11), these systems do not necessarily provide the level 

of accuracy and up-to-date cost information that some survey participants are seeking (Fig. 

10). The need for more accurate cost information may suggest that product costing systems 

used by respondents requires an update with more modern cost calculation and allocation 

techniques. Other important objectives indicated by respondents were to have an easily 

available, up-to-date, and easy to operate product costing system (Fig. 10). Although product 

costing information is created by a relatively small group of professionals, it can affect the 

work of other groups within the organization as well. Therefore, appropriate product costing 

information must be made available to all people involved, directly or indirectly, in the costing 

process. Anecdotal evidence exists that many industry participants are using Microsoft Excel 

spreadsheets for product costing because such MS Excel systems are easy to create, operate, and 
Product Costing Guide for Wood Dimension and Component Manufacturers General Technical Report NRS-140 23

customize. The sophistication of these spreadsheets varies considerably among companies, and 

while some may deliver information that is in line with the needs of the company, others may 

be less sophisticated or less reliable in the information they deliver.

Given the prevalence of traditional accounting systems in the North American hardwood 

dimension and components industry, this manual describes WoodCite, a software package of 

a traditional job order based costing system. Consequently, as a next step, a product costing 

software package based on the findings from the 2010 Product Costing Survey was developed. 

The system developed and explained in the following section assigns overhead cost to products 

accurately, at low cost, and with little effort, while creating competitive bids for external 

customers.

5. WOODCITE 1.0 – PRODUCT COSTING SOFTWARE 

PACKAGE

WoodCite 1.0 (Palmer et al. 2014) is a product costing software package designed for 

hardwood dimension and component manufacturers. WoodCite is a Microsoft® Access 

application that calculates a company’s product cost and creates competitive bids for quote 

requests. Creating competitive bids to external customers requires two steps: (1) defining 

a competitive selling price by evaluating the company’s strategy, competitive situation, 

shareholder expectations, and other demands, and (2) calculating the cost of the product from 

the design stage to customer delivery. The gap between the selling price and product cost is the 

company’s profit margin.

WoodCite is a job-order-based costing software package. A job order costing system allows 

companies to maintain separate records about each quote request, which can be used to 

estimate similar quote requests in the future. In this type of system, direct material, direct 

labor, and overhead costs are accumulated by individual products or jobs. Then, the total sum 

of all the costs of a product or a job is divided by the number of units produced to obtain an 

average cost per unit.

The structure of WoodCite consists of a menu bar, tool bar, navigator strip, and data entry 

tables as displayed in Figure 12. The menu bar, identical to any Microsoft Access application, 

includes file, home, create, external data, and database tools. The tool bar consists of 

commands, such as tasks, tools and applications, references, commands, edit company data, 

view all products, review orders, and view the quote sheet. The navigator strip includes 

selectable icons, such as save, add new customer, delete current customer, add new order, 

delete current order, search for customer, view charts, and view documentation. Lastly, data 

entry tables allow users to enter information received from customers or information necessary 

for product cost calculation. The WoodCite application is free and can be downloaded from 

http://www.nrs.fs.fed.us/tools/WoodCite/.
24 Product Costing Guide for Wood Dimension and Component Manufacturers General Technical Report NRS-140

6. WOODCITE 1.0 – PRODUCT COSTING EXAMPLE

The following example demonstrates the capabilities of WoodCite. The wood component 

manufacturer is referred to as Wood Inc. As a starting point, WoodCite was filled up with 

historical data records of Wood Inc., including company information, workforce data, activity list, 

historical overhead costs, shipping and payment terms, material information, and a list of products 

manufactured. The customer in this example is represented by Mr. John Smith, a potential new 

client whose contact information was entered and saved into WoodCite with an assigned customer 

ID (12345, Fig. 13). Mr. Smith, purchasing agent of a major wholesaler business, placed his quote 

request (JS-0001, Fig. 13) for 120 maple kitchen island legs on January 23, 2013. The quote request 

was taken by Audrey Clark, administrative personnel of Wood Inc. as is shown in Figure 13.

The product cost calculation begins with calculating the direct material cost (Figure 14). To 

produce one kitchen island leg, Wood Inc. purchases a premade blank in the size (in inches) of 

3.5 x 3.5 x 36, which is equivalent to 3.0625 board feet (calculated as (3.5 x 3.5 x 36) ÷ 144). 

The unit price of a premade blank varies by species. In this example, it is assumed that one board 

foot of maple costs $4.50. Therefore, to produce 120 maple kitchen island legs, Wood Inc. 

needs to purchase 367.5 board feet (calculated as 3.0625 board feet multiplied by 120 kitchen 

island legs) of premade set of maple blanks. Notice that in this example Wood Inc. purchases a 

dimension blank that already has costs attributed to the making of the blank, so no investigation 

into rough mill yield needs to be undertaken. If the company does not buy blanks, the yielded 

cost applies and the costs to buy lumber and process it into squares have to be taken into account. 

The lumber cost per board foot for maple ($1.25/board feet) would be inexpensive, but the 

yielded price (approximately 55 percent yield) plus glue and labor costs would then increase the 

per board foot price of the dimensioned square accordingly. Also, no freight or other costs are 

charged by the supplier in this example. Consequently, the total material cost of the requested 

product is $1,653.75 (calculated as $4.50 multiplied by 367.5 board feet).

Figure 12.—The structure of WoodCite Version 1.0.

Menu bar

Tool bar

Navigator

strip

Data entry 

table

14
Product Costing Guide for Wood Dimension and Component Manufacturers General Technical Report NRS-140 25

Figure 13.—Customer and product information sheet in WoodCite 1.0.

Figure 14.—Material cost calculations in WoodCite.

15
26 Product Costing Guide for Wood Dimension and Component Manufacturers General Technical Report NRS-140

Figure 15.—Direct labor cost calculation table in WoodCite.

Figure 16.—The overhead cost calculation form.

In a next step, direct labor cost is calculated (Fig. 15). To produce a kitchen island leg, the 

purchased premade maple blank must go through the following processes: (1) lathe turning, 

(2) nash sanding, (3) side stroke sanding, (4) hand sanding, and (5) packaging. Wood Inc. 

has an assigned employee for each of the above described tasks and the company also recorded 

the time necessary to perform each task. The employee assigned to lathe turning processes 70 

blanks per hour on a $8.50 hourly rate, resulting in a $14.45 (calculated as $8.50 multiplied 

by 1.7 hours of operation to produce 120 blanks) labor costs. Figure 15 displays the labor cost 

window of WoodCite containing this information. Similarly, the employee assigned to nash 

sanding processes 120 blanks per hour on an $8.25 hourly rate, resulting in a $8.25 labor cost; 

the employee assigned to side stroke sanding processes 45 blanks per hour on an $8.25 hourly 

rate, resulting in a $22.02 labor cost; the employee assigned to hand sanding processes 120 

blanks per hour on an $8.25 hourly rate, resulting 

in a $8.25 labor cost; and finally, the employee 

assigned to packaging is able to pack 120 blanks 

into a United Parcel Service box in one hour on an 

$8.50 hourly rate, resulting in a $8.50 labor cost. 

Consequently, the total labor cost of the requested 

product is the sum of each step’s labor cost: $61.47 

(calculated as $14.45 plus $8.25 plus $22.02 plus 

$8.25 plus $8.50).

The next step in calculating the cost of the 

requested product is calculating overhead cost 

(Fig. 16). Historical overhead cost data of Wood 

Inc. for the last 30 months were already entered 

17
Product Costing Guide for Wood Dimension and Component Manufacturers General Technical Report NRS-140 27

Figure 17.—WoodCite’s product cost information table (highlighted). 

into WoodCite. Entering the total number of labor hours (7.37 hours) and the total number 

of machine hours (5.14 hours) enabled WoodCite to automatically calculate the total overhead 

cost for the requested products: $813.81.

Wood Inc. has a policy of charging a $55 set-up charge for each project; therefore this $55 was 

entered into the other cost field (Fig. 17). The company decided to apply a 40 percent margin 

for its high quality product and provide no discount to its customer. As shown in Figure 17, the 

quote was sent to the customer on the same day it arrived (January 23, 2013) by Audrey Clark.

The quote sheet displayed in Figure 18 shows that the quote Mr. Smith requested was sent on 

January 23, 2013, by Audrey Clark and is valid for 45 days. The quote sheet lists the contact 

information of the customer as well as the company information. Also, details about Mr. 

Smith’s inquiry are documented in the quote sheet. The unit price of one maple kitchen island 

leg is listed as $35.89, and the total price of all 120 requested legs is listed as $4,306.72. The 

quote sheet also shows that Wood Inc. proposes a UPS ground delivery, typically in 1 to 5 days, 

to the potential customer (Fig. 18).

 

19
28 Product Costing Guide for Wood Dimension and Component Manufacturers General Technical Report NRS-140

Figure 18.—The product quote sheet in WoodCite.

20
Product Costing Guide for Wood Dimension and Component Manufacturers General Technical Report NRS-140 29

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Printed on Recycled Paper

Andersch, Adrienn; Buehlmann, Urs; Palmer, Jeff; Wiedenbeck, Janice K.; Lawser, Steve. 

2014. Product costing guide for wood dimension and component manufacturers.

Gen. Tech. Rep. NRS-140. Newtown Square, PA: U.S. Department of Agriculture, Forest 

Service, Northern Research Station. 31 p.

The North American hardwood dimension and components industry plays a critical role in the 

hardwood forest products industry as the industry is a user of high-value hardwood lumber. 

Customer expectations, global markets, and international competition, however, require 

hardwood dimension and components manufacturers to continuously improve their ability to 

manage their products and businesses. Accurate and timely product costing information is 

critically important for companies in planning the optimal utilization of company resources. 

While an overestimation of product costs can lead to loss of potential business and market 

share, underestimation of product costs can result in financial losses to the company.

This paper introduces a product costing software package called WoodCite, which is designed 

specifically for small and medium-sized hardwood dimension and components manufacturers. 

WoodCite allows companies to determine product costs and create competitive bids based on 

their information. WoodCite uses a regression model to estimate overhead cost of a product 

based on historical cost information provided by the user. The application is available for free 

at http://www.nrs.fs.fed.us/tools/WoodCite/.

KEY WORDS: WoodCite, product costing software, traditional product costing, hardwood 

dimension and components, small and medium-sized enterprises

Published by: For additional copies:

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NEWTOWN SQUARE PA 19073 359 Main Road

Delaware, OH 43015-8640

Fax: (740)368-0152

December 2014 Email: nrspubs@fs.fed.us

Manuscript received for publication 19 November 2013
Northern Research Station

www.nrs.fs.fed.us

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