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Bears Business Brief: Grandpa, does it cost too much?

December 12, 2016 by Mary Grace Phillips

Les Heitger
Les Heitger

By: Les Heitger

When my lovely granddaughter Allyson was 4 years old, I took her to the mall where she found a Minnie Mouse doll she really wanted. Knowing her bed was full of stuffed animals, I said, “Maybe we should think about it and come back later.” She looked at me with her beautiful eyes and sweet smile and asked, “Why, Grandpa? Does it cost too much?” As you probably guessed, I bought the doll. I marvel at the early age that some people come to understand the concept of cost and how cost impacts what we buy and the amount we will pay for items.

In its simplest form, “cost is the amount we pay for some product or service”. [1] Notice the concept has two parts. One is identifying the product or service being acquired, sometimes called the “cost objective.” The other is determining the amount paid for the product or service.

Although everyone uses the term “cost,” they may not understand exactly what it is or how to measure it. Sometimes determining cost is simple. For example, with Minnie Mouse it was easy to identify what we were buying; and, the cost (price charged by the store) was clearly marked. Like many things we purchase, the cost was known and the benefit (happiness) was expected to be more than the cost. But sometimes the cost objective is not as obvious and the amount paid is not so clear. Virtually every person and organization has limited resources to spend, and if we incorrectly measure cost we can make bad choices about how to allot those resources. Cost measurements are most difficult when we don’t clearly understand or state the cost objective.

To illustrate this concept in class, I ask students to break into groups to calculate the cost of a four-year college education. Because the students are currently enrolled in such a program, you might think each group would arrive at a similar number. However, results vary significantly as each group identifies different appropriate/essential items to include in the cost. For example, some students include living expenses, while others do not because such expenses would be necessary whether or not a person was in college. All groups include costs unique to the college program such as tuition, fees and books. Some teams include the “opportunity cost” of lost wages while attending college, while others do not. Students soon learn that these differences of opinion about what should be included may suggest the challenges of attempting to identify many other possible cost objectives.

What activities and associated costs should be included in developing a new product, operating a new marketing program, or determining the cost of a family vacation? In each case, one must identify the required activities and associated costs. The more complex the situation, the more care needed to describe the cost objective and assign related costs.

Although Allyson’s question about Minnie Mouse sounds simple, it causes us to think about similar but more challenging purchasing decisions. To be effective in making these decisions, we must carefully and logically decide on the cost objective and the necessary resources when measuring the cost of anything — home renovations, professional training or new equipment. If we fail to do so, we may find that it truly did“cost too much,” only we did not understand that until it was too late.

Professor Les Heitger, Ph.D., CPA, is the BKD Distinguished Professor of Forensic Accounting in the School of Accountancy at Missouri State University, He is the National President of the Forensic Accounting Section of the American Accounting Association (AAA), he is co-author of Forensic and Investigative Accounting, and he teaches primarily graduate Forensic Accounting courses.  He can be reached at lesheitger@missouristate.edu  

References

Cornerstones of Managerial Accounting, 6th Edition, Mowen, Hansen, and Heitger, (CENGAGE Learning, 2016).

This article appeared in the December 3, 2016 edition of the News-Leader and can be accessed online here.

Filed Under: Bears Business Brief, College of Business, School of Accountancy Tagged With: Les Heitger

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