Cost Systems Essay

961 words - 4 pages

Costing Systems
Costing systems are part of the overall accounting system used by companies to measure sustainability performance and identify and account for expenditures accurately (Tatum, 2011). Three cost methods used as part of the decision-making process are Activity-based costing (ABC), Life-cycle costing (LCC), and Full cost accounting (FCA). The benefits and limitations of each in relation to sustainability efforts are examined.
Traditional cost accounting methods were based on labor intensive industries consisting of no automation and minor product specialization or diversification (Emblemsvag, 2010). Cost was driven by product development and services (Epstein, 2008). However, activity-based costing (ABC) refutes this assumption.
ABC allocates cost relative to the activities performed by a company such as employee training and direct labor first and the products, services, and customers impacted by these activities second resulting in a cause and effect relationship (Epstein, 2008). Consequently, the central benefit of an ABC analysis is the direction of measurement used to effectively allocate social and environmental costs, increase productivity, and appropriately distribute or reduce overhead costs (Epstein, 2008).
Life-cycle costing (LCC) is a second account strategy derived from the Life Cycle Assessment (LCA) system used to measure environmental impacts linked to a product, process, or service (Epstein, 2008). Hence, LCC focuses on external and internal cost of activities linked to product development, distribution, and maintenance over time (Dorf & Kusiak, 1994).
Moreover, when LCC is applied to social and environmental costs “it consists of monetizing social and environmental impacts throughout a product’s life-cycle” (Epstein, 2008, p. 111). Hence, an advantage of LCC is its ability to provide comprehensive financial assessment (present and future) of products, services, and activities associated with sustainability strategies (Epstein, 2008). Thus, while ABC focuses on cause and effect related to activities, LCC measures present and future costs of a business activity, product, or service (Dorf & Kusiak, 1994).
Full Cost Accounting (FCA) is the third account system. FCA determines the price of products and services by assessing their true cost including social and environmental costs (Conway-Schempf, 2011). FCA incorporates the bottom line costs of a company’s activities with the impact of these activities on the full social costs to society (Conway-Schempf, 2011). For example, societal costs from business activities include external costs such as health issues from car emissions.
Inasmuch as many externalities are intangibles such as preserving ecosystems, factoring them into a company’s cost structure is problematic. However, according to Conway-Schempf (2011), “recognizing these externalities makes long-term sense for corporations and governments - today’s...

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