Should the Cost of goods sold (COGS) be calculated using Activity Based Costing methodology?
COGS is based on financial accounting, and in the US is based on GAAP rules. In other words, COGS must include *only* the direct costs that can be applied to that particular product, product line, or business unit, etc. Every other cost (indirect costs, overhead, etc.) falls into a different category, such as Sales, General & Administrative (SG&A). Activity-based Costing (ABC) is a *great* tool for understanding the cost drivers behind indirect and overhead costs, assuming that managers can make *significant* changes in product mix, production plans, etc. However, to mix the two would do violence to the GAAP system. GAAP is *not* aimed at maximum insight for managers. It’s aimed at consistency from company to company for shareholder reporting, and to make auditing feasable and reliable. If one company used ABC to include indirect costs in COGS, then their numbers would not be comparable to other companies who use GAAP methods. By the way, the same argument goes for Intellectual Capital
