Failure to Recognize Generally Accepted Accounting Principles and Income Tax Accounting has Nothing to do with Management Reporting
One of the main purposes for having a cost accounting system is to assist businesses in accurately valuing inventory. This is a very appropriate use of a management reporting system and a necessary byproduct of whatever functions the management reporting process is designed to support. However, management reporting processes are generally far more comprehensive than the simple needs of inventory valuation for book and tax reporting.
I’m sure most readers are aware that there are very specific rules associated with Generally Accepted Accounting Principles (GAAP) and how inventory should be valued, particularly in a manufacturing environment. There are also specific rules related to how that same inventory should be valued for income tax purposes. Those rules are not necessarily the same, in fact, they are most likely different; and it does require some manipulation of the costs to be recovered in inventory valuation. A properly designed cost accounting system can easily handle both of these processes with the cost supervisors making simple choices as to what method of valuation they want to use when the inventory report is run. However, good cost managers recognize that the information required to appropriately account for your inventory for either book or tax purposes may have little to do with what the real purpose of the costing system, which is to provide comprehensive management information to operations managers relative to improving productivity, profitability and efficiencies. This is not to say that income tax and book accounting is not important, nor that they should not be supported by the cost accounting system, but only to point out that it is not the only type of information that is available from the costing system. I would go as far as to say that the fundamental building blocks of the cost system that go together to produce accurately valued inventory for both book and tax accounting may be totally inappropriate for management reporting.
Items like tax depreciation or certain book accruals may be completely valid for book or tax reporting but terribly misleading for those individuals attempting to use management reporting for make or buy decisions or perhaps determining profitability of a product or line of products. Further, it is very likely that the system that is put together to support GAAP and income tax reporting must be significantly modified by the management accounting team to develop information that is useful to management reporting.
The idea that every product has one true cost that can be used for all purposes is completely inaccurate and if it is pursued will result in misinformation and erroneous decisions.
I suggest to any cost manager who is primarily interested in inventory valuation that they consider other valuable components of the cost system and how they may be implemented as the system is designed and initiated. It is not hard to do if the cost manager assigned with the implementation has a comprehensive view of what the various purposes of the cost system could or should be. It is important, however, to recognize that no matter how thorough a new cost system implementation is that there will always be fundamental differences between book, tax and management reporting.
