To determine profitability of a particular product or product line, it is vital to know precisely what costs are associated with manufacturing it.

According to the book, Relevance Lost, by Robert Kaplan and Tim Johnson, virtually all management accounting practices in use today had been developed by 1925. However, most modern manufacturing techniques had barely been dreamed of in 1925---things like robotics and computer controlled automation.

What does all of this mean? Greater sophistication in manufacturing technology increases overhead costs and decreases labor costs. Attempting to convert these overhead rates into burden rates that can be based on direct labor is becoming increasingly irrelevant. Twenty five years ago direct labor represented 40% of production costs. Today the national average is 5%.

There are a number of cost accounting and product pricing "systems" that take these changes into account. They have several things in common. First, they require a thorough understanding of the manufacturing process for each product. Costs should be assigned to products based upon their consumption of activities.

This explanation is an oversimplification of some sophisticated systems that employ concepts like "overhead transactions," "process value analysis," and "activity based costing." But if you are basing pricing and marketing decisions on your cost accounting procedures, a "fresh look" at how you go about cost accounting may make a crucial difference in the impact of those decisions on your business.