The following book review does not represent the official position of the Department of Defense or any other government agency. It is presented here solely as an item of interest. Without question, Activity Accounting by James Brimson is a must read for any serious student of cost accounting, but particularly for the financial management of any organization that may have either reason or suspicion to believe that its relative market position may be linked to its product prices. The level of global competition has changed dramatically over the last 50 to 75 years with the introduction of new products, new technology, new manufacturing techniques, new management philosophies. While nearly every aspect of the business environment has changed during this period with nearly blinding speed, some key areas have been slow to recognize such changes and make appropriate adjustments.
Cost accounting is a case in point.
The basic principles of cost accounting have root in the 1920s when the predominant component of manufacturing cost was, as had always been, direct labor. As a result, it was reasonable to assign, or allocate, indirect costs to products on the basis of direct labor on the assumption that indirect costs always followed labor on a relative basis. However, as time went by, due to many factors including technological advances in manufacturing processes, labor has become a less and less contributing part of the cost of manufacture, while during the same time frame the indirect cost component has increased nearly proportionately to seemingly fill the void. The fact that indirect costs have increased so dramatically, and now comprise such a significant portion of manufacturing costs, exacerbates the very problem of traditional cost accounting. Traditional cost accounting techniques, particularly its indirect cost allocation techniques, quite often yield results that distort total product costs, overstating the true cost of some products while understating the cost of others.