intematioMI journal of

production
economics
ELSEVIER Int. J. Production Economics 46-47 (1996) 441-457

Product costing in ten Swedish manufacturing companies

Peter Alnestig*, Anders Segerstedt
Miilardalen UniversiO,, Box 883, S-721 23 Viisterds. Sweden

Abstract
This paper presents the main results from case studies in l0 Swedish manufacturing companies concerning their
product costing. The main purpose of the study is to find out what models of product costing the companies use, what
allocation bases are applied. Several questions have been asked to the companies: What is the purpose of the prod-
uct costing? Is a special product costing used for inventory valuation? Is full costing or variable costing used? How
are depreciation costs and cost of capital treated? Is some sort of activity-based costing used? If so, which are the cost
drivers? The study is a case analysis, no questionnaires are used. The study presents arguments that a separation of
product costing in "Activity-Based Costing" or "traditional costing" is not possible, but also that more "ABC-think-
ing'" is necessary.

K~tvwords: Product costing: Activity-based costing; Management accounting practice

I. Introduction financial accounting demands, which raises the

Models of product costing should reflect the real
situation of production and cost structure as accu-
rate as possible. However, the circumstances are
changing rapidly. The fast technical development
and the automation o f manufacturing processes in
recent years increase the equipment component
and decrease the labour component in production
facilities. Flexible manufacturing systems (FMS)
and new philosophies in manufacturing (just-in-
time, total-quality-management, group technol-
ogy, etc.) have resulted in a new manufacturing
environment not experienced a few years ago.
Accounting systems are mostly designed to meet
* Corresponding author.
question of weather or not the developments of
product costing have been adapted to the change
of its environment. This discussion harmonises
with the well-known book of Johnson and Kaplan
[1]: "Relevance lost - The rise and fall of man-
agement accounting". They argue that traditional
costing methods (in use in the US in 1987) were
fully developed in the 1920s. Johansson and
Samuelson [2] point out that costing and account-
ing systems have developed differently in various
countries. Before World W a r II most influences
concerning costing and accounting from abroad
to Sweden came from Germany, but thereafter
most influences have come from the US. The situ-
ation in the US can therefore not be interpreted to
represent the situation in Sweden. This study is
performed to answer what costing methods and

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SSD10925-5273(95100164-6
442 P. Alnestig, A. Segerstedt/Int. J. Production Economics 46-47 (1996) 441-457
models of product costing are used in 10 different
Swedish manufacturing companies during late
1993.
Spicer [3] presents a detailed review of (in
English) presented studies, mostly from English
speaking countries. Many studies mentioned by
Spicer are available in Cooper and Kaplan [4].
There have been previous studies of product cost-
ing practices and techniques in Sweden. Ask and
Ax [5] have with surveys studied about 200
Swedish companies of different sizes. Frenckner
and Samuelson [6, 7] used a questionnaire and
studied 22 large engineering enterprises, and
Ahlberg and Sundqvist [8] did a smaller sample
survey on product costing practices and tech-
niques.
Spicer [3] sees an emerging role of case and field
research in cost and management accounting
research. From surveys it is difficult to clarify how
different costs really are allocated to the various
cost objects, i.e., to understand what model of
product costing the companies use. Yin [9] pro-
vides guidance on what forms an exemplary case
study should take and he distinguishes between
exploratory and explanatory studies, this study is
a field investigation and can be classified as an
exploratory study. Several questions have been
asked to the companies: What is the purpose of
the product costing? Is a special product costing
used for inventory valuation? Is full costing or
. , , Cost elements
\]Dircetmatefi]al /'~ ~ ~
~ ~, Me,Overhea~
at. ~Dirc~°st
centr~)
I .
Fig. 1. Principal cost allocationscheme(for Segerstr6m& Svenssonand others).
variable costing used? How are depreciation costs
and cost of capital treated? Is some sort of activ-
ity-based costing used? If so, which are the cost
drivers? The study has performed through daily
visits to the companies, where we have interviewed
key personnel, complemented if necessary with
telephone calls.
The paper has the following outlay. In Section 2
the ten companies and their model of product cost-
ing are presented one by one in alphabetical order.
Observe that the cost allocations in different steps,
indirect cost centre ~ direct cost centre--~ cost
object, like presented for Segerstr6m & Svensson
in Fig. 1, is usual for most of the presented com-
panies. Section 3 treats subjects which are debated
how to handle properly in a product costing model,
connections and comparisons between the different
companies are performed. Finally, in section 4, we
discuss some concluding remarks and extensions
to this study.
2. Models of product costing
2.1. A B B M o t o r s A B
ABB Motors is a part of the ABB group. The
ABB group has 213000 employees all over the
world and its headquarters is in Zurich. The ABB
~[/ ~
CDireet
c°stcz[re2~.~
J,
1
 P. Alnestig, A. Segerstedt/Int. J. Production Economics 46 47 (t996) 441-457
group is divided into five segments which in turn
are divided into 65 business areas. ABB Motors is
a part of the segment " I n d u s t r y " and the business
area " M o t o r s " . In 1993, ABB Motors had about
340 employees and total sales of about 420 million
SEK. ABB Motors produces electrical motors in
aluminium in sizes between IEC 112 and IEC 250
and with effective power between 3 and 75 kW.
ABB Motors has the following model of product
costing:
Model Jot product costing
Direct material
Materials overhead
Direct labour
Production overhead I
Direct material, semi-manufactures
Production cost I
Production overhead II
Production standard full cost
Sales and Administration costs
Standard full cost
Direct material is the cost for purchased exter-
nal material, e.g., copper wires, aluminium, roll
bearings, etc. Motors keeps records over the aver-
age purchase price. A withdrawal from the pur-
chase inventory is valued with the actual average
purchase price in Motors's accounting information
systems. Material overhead is costs for checking
and handling of materials, interest on purchase
materials and treatment of invoices (from suppli-
ers). The purchase materials are divided into six
groups with different burden rates for materials
overhead. The burden rates differ between 1% and
14'7,, of the material cost. For every manufactured
product there are estimated standard times for pro-
duction in different cost centres. (A cost centre is
here one machine or a small group of machines).
The cost of Direct labour is determined by multi-
plying the standard times with average man hour
salary in the production centres. Production over-
head I is separated in variable costs and fixed costs.
Repair and maintenance, supplies and allocations
from indirect cost centres, like tool service and
quality control are defined as variable costs.
Salaries for staff personnel, rents for buildings and
443
machines, electric power, water and other remain-
ing costs are defined as fixed costs. Costs for
Production Management, Production Control and
Quality Management are fixed costs and also allo-
cated to direct cost centres. A burden rate for every
cost centre is established in percentage of direct
labour costs (separate burden rates for variable
costs and fixed costs). ABB Motors leases their
buildings for production and administration from
another c o m p a n y in the ABB group, therefore the
rent is real and not a calculated cost. The rent for
machines on the other hand is a calculated cost, or
estimated cost, consisting of a calculated "cost of
capital" and calculated deprecations based on a
current estimated value of the machine. For
machines the cost of capital is calculated as cur-
rent value of the machine divided by two and
multiplied with an interest rent of 7.5'7,,. Calcu-
lated depreciations are determined by current
value divided by estimated life time for the
machine or facility.
Direct material, semi-manufactures are costs for
own produced components to the motors. In these
components the costs for production overhead 1 are
not incorporated. Production overhead H costs are
separated into two parts. The costs for Process
design and development, Administration and
Finance are allocated to the products with a bur-
den rate based on Production cost I, different
groups of products have different burden rate
according to estimated cause of costs. Costs for
product design and tools have a separate burden
rate. A product group that initialises higher costs
has a higher burden rate than other groups. The
burden rate for sales and administration costs
based on production standard full cost allocates
also costs for freight, packing and interest oil
account receivables.
The management information system is based
on standard costs and each month is measured in
what part standard costs agree to actual costs. The
standard costs are indexed so that they can be
increased or decreased without a total recalcula-
tion of all items.
ABB Motors have made one test to allocate sales
and administration costs by ABC-costing. The
costs were allocated to establish a result per cus-
tomer. Used cost-drivers were: number of offers,
444 P. Alnestig, A. Segerstedt/Int. J. Production Economics 4 6 - 4 7 (1996) 441-457
number of visits to customers, number of travel
days in different countries, number of order lines.
2.2. ASSA AB
The ASSA AB originates from 1881. The first
cylinder lock was manufactured in 1939 and it is
still the main product. In 1993 the sales was about
285 million SEK and there were about 350
employees.
ASSA AB is using price lists produced by the
marketing department. One part of the price is
determined by the production cost. That means the
price has to cover, except production costs, also
administration and sales costs and profit. The
model used for product costing is a standard full
cost model which is a part of an MPC-system
(=material and production control) (Mapics).
However, ASSA AB today uses the model to esti-
mate a production cost. The standard costs are
determined once a year by the budget work. The
standard costs are used for the inventory valuation
and measurements of profitability during the year.
Model for product costing
Direct material (DM)
Component, Subcontractor
Material overhead (MAO) ( = % of DM)
Direct labour (DL)
Variable manufacturing overhead (MAO)
Variable manufacturing cost
Fixed manufacturing overhead (FAO)
Standard production cost
The standard costs are based on a normal vol-
ume (normal machine-hours and man-hour in
different machines are established from how many
hours that normally is utilised of their total capac-
ity). Manufacturing overhead is divided into vari-
able and fixed overhead. Direct material can be
purchased material or manufactured components,
material price for the component is the standard
production cost. Direct labour is the average cost
per man hour including payroll fringe costs in per-
forming machines or work centres.
Variable and fixed overheads in manufacturing:
each cost centre includes several production sec-
tions and every section has its own allocated vari-
able and fixed overheads. Allocation bases are e.g.,
for rental - area, tools - historical experience,
repair and maintenance - registered for each occa-
sion, etc. By dividing overhead per production sec-
tion by normal man hours, a cost per-hour-rate is
given. This cost per-hour-rate, which includes vari-
able and fixed costs, is used in the cost account-
ing. Depreciations are fixed overhead and
estimated with the help of a register of machines.
The depreciation rate is based on acquisition val-
ues but when the machine is totally "written-
down" an amount equal to the depreciation of the
last year is still used for the coming years. The pro-
duction cost does not include the cost of capital.
2.3. Avesta SheffieM AB, Cold Rolled Division,
Nyby plant
Avesta Sheffield AB, Cold Rolled Division has
activities in four places. In Sheffield, Panteg, and
Nyby there are rolling-mills and in Eskilstuna there
is a metal trading company. Our investigation con-
siders the Nyby plant. The main product is stain-
less steel (18/8). The production is about
80,000 ton a year. Sales in 1992 were 1.210 million
SEK and there were about 400 employees.
Avesta Sheffield, Nyby plant uses the standard
full cost, as calculated in the product costing
model, on internal pricing. On offers, the full cost
is subordinated by the current market price. Every
cost in the model below is calculated per kilogram :
Model for product costing
Direct material
Operational cost (own)
"Ton cost"
Manufacturing cost
Overhead
(Administration)
Quality control cost
Cost of capital (material)
(raw material value' interest rate)
Cost of capital (fixed assets)
(capital equipment-interest rate)
 P. Alnestig, A. Segerstedt/lnt. J. Production Economics 46 47 (1996) 441 457
Credit cost
Net cost (net price)
Freight
Packaging, own
Standard full cost
Direct material is a dominating part of the full
cost. Since the raw material is delivered by an inter-
nal unit (Primary Products and Steckel Division)
a transfer price is used. This transfer price is based
on raw material cost and standard manufacturing
costs including freight. No direct labour is used,
so other costs than material are treated as indirect
costs. An important component of indirect costs is
machine cost, which includes operational costs and
depreciations. There are twelve machine cost-cen-
tres, each consisting of one machine (e.g., rolling-
mill), where a machine hour cost is estimated.
Operational costa" (own) are the sum of cost per
machine hour multiplied with operation time
divided by total weight for the different machines
manufacturing the calculated product. The opera-
tional costs are the budgeted costs of a "final" or
direct cost centre together with allocated overhead
costs from "intermediate" or indirect cost centres.
These are machine-related cost-centres (e.g.
Maintenance). Depreciation costs and cost of
capital are excluded in the cost-centre budget.
However, when it comes to estimating the machine-
hour cost the depreciation costs are included. The
cost of capital is not a part of the machine-hour
cost estimation. It is shown separately in the prod-
uct costing model. The elements to estimate the
cost per machine hour are: (1) operational costs
(own budgeted costs in the machine cost centre),
(2) allocated costs (from intermediate machine
related cost centres), (3) depreciation costs and (4)
number of machine-hours. "Ton cost": Indirect
manufacturing costs, not directly connected to the
machines, are allocated on the basis of operational
costs (which means that long operation times and
several operations lead to high " T o n costs").
The allocation base for Overhead is weight.
Total costs from the cost centres of Management,
Marketing, Finance, Personnel, Planning, etc. are
divided by the total tonnage. The allocation base
for QualiO, control costs is weight. There are
considerable costs for continuous testing of the
445
material. Therefore, quality control costs are
shown separately. Cost of capital and credit costs:
The heavy equipment and the considerable value
of the material require separate items in the cost-
ing scheme. An estimated/calculated interest rate
is used and can be changed from time to time.
Freight: According to an agreement with the car-
rier, the price is collected from a price-list.
Packaging: The company has its own function for
packaging and the various costs are collected from
cost-tables.
2.4. Denver Sala A B
Sala is part of the Svedala lndustri AB, which is
an international group of companies mainly cater-
ing to the minerals processing, mining and con-
struction industries. Equipment produced by Sala
comprise an extensive range of products for most
unit operations in the mineral industry, including
slurry transport. Sala offers complete equipment
systems and is also producing centrifugal pumps.
Sales in 1992 was 175 million SEK and there were
about 250 employees. (The invoiced sales can differ
from year to year due to large projects.)
The model of product costing is a part of an
MPC-system (Movex). The estimated figures in the
model of product costing have an important role
on pricing. The figures are the base for a price list
for centrifugal pumps, which is the basic instru-
ment when an offer is made for a customer. The
model of product costing has three possibilities
to calculate total cost: (1) standard costs (updated
annually (budgeted)): (2) actual costs (current
price) and (3) simulated costs (for budgeting).
Stan&trd costs are permanent during the year.
They are used mainly for the direct material and
for the purpose of pricing. Actual cost is currently
updated and it is used for inventory valuation.
Simulated cost is used to estimate figures when the
budget is prepared.
Variable costs (VC) and fixed costs (FC) are
specified in the model of product costing. Only the
direct manufacturing costs vary entirely (VMC)
due to the production volume. The purpose of the
specification (VC or FC) is to find out whether or
not variable costs depend on a specific order.
446 P. Alnestig, A. Segerstedt/Int. J. Production Economics 46 47 (1996) 441-457

Model Jor product costing

Direct material (DM)
Direct labour (DL)
Payroll fringe costs
VC
Variable manufacturing cost (VMC)
Purchasing costs FC
Carrying costs VC
Handling charge, Storage costs FC
Rental DM-inventory FC
Material overhead (MAO)
Production Administration-Management, FC
Planning, Preparing
Rental-Production unit FC
Depreciation-Equipment Depreciation
Repairs and Maintenance FC
Indirect labour FC
Heat, Light and Power-Plant/Equipment FC/VC
Lubricants, Supplies VC
Manufacturing overhead I(MO1) (Depending on production)
Cost of guarantee VC
Inventory variances/Ending inventories VC
Rental-Office FC
Heat and Light-Office FC
Depreciation-Office equipment Depreciation
Depreciation-Machine tools Depreciation
Manufacturing overhead 2 (MO2) (Not depending on production)
Total Manufacturing Costs (TMC)
Freights (to customer) VC
Packaging VC
Cars VC
Laboratory and service cars VC
Engineering VC
Travel costs VC
Purchasing-Mills, etc. VC
Non manufacturing overhead (NMO)
Total cost (TC)

Direct material is, as mentioned, standard cost
on pricing and actual cost for stock valuation.
Direct labour is an average cost per hour per work
centre and does not change during the year.
Payroll fringe costs is 83% of Direct labour.
The indirect costs in the model are separated
according to: (1) Material overhead (MO); (2)
Whether we have an ongoing production or not
(MO1, MO2) and (3) non-manufacturing overhead
(NMO).
Material overhead: Costs related to purchase of
the direct material, carrying costs, storage costs,
etc. are estimated to be about 10% of direct
material. Accordingly, the rate used in the cost
 P. Alnestig, A. Segerstedt/lnt. J Production Economics 46 47 (1996) 441 457
accounting, as a mark-up, is 10% of all direct
material (but a maximum amount per order exists).
Manu[acturing overhead 1: Costs of production
administration, rentals, repairs and maintenance,
depreciation (based on acquisition values) and
indirect labour costs are classified as fixed costs.
Lubricants, supplies and part of heat, light and
power are variable costs. The total MO1 is esti-
mated to be about 403% of direct labour. How-
ever, in the cost accounting, the allocation base is
machine-hours. Every direct cost-centre/work-cen-
tre has its own cost per hour. Distinctions are made
between operation time and set-up time. There are
thirteen final cost-centres and a number of indirect
cost-centres to support them. Manufacturing over-
head 2: Manufacturing costs out of production.
Cost of guarantee, inventory variances/ending
inventories, rental-office and depreciation-office/
machine tools. The two first mentioned are
classified as variable costs and the others as fixed.
The total cost of MO2 is estimated to be 9% of
VMC. The percentage is used in the cost account-
ing. Non-manufacturing overhead: Finally, there
are some variable costs that are classified as
non-manufacturing overhead. These are freights,
packaging, cars, laboratory and service cars, engi-
neering, travel and certain supplementing pur-
chase. Total manufacturing costs (TMC) consist of
the traditional operating costs (VMC, MAO,
MOI, MO2) including deprecia-tion based on
acquisition values. TMC estimated in actual costs
is used for the valuation of inventories.
An ABC-project, with hired consultants, has just
started. Some cost drivers (about 90) and activities
have been identified in a first step.
2.5. Kanthal AB
Kanthal supplies manufacturers of electrical
appliances and heating systems with wire that gen-
erates heat through electrical resistance. Kanthal
also produces a wide range of heating elements for
electrical industrial furnaces, termobimetals for
temperature control devices used in manufacturing
of thermostats, circuit breakers and household
appliances. Kanthal has manufacturing facilities in
Hallstahammar, Brazil, Australia, UK, Germany,
US and Italy.
447
Sales in 1993 were about 1100 million SEK,
export sales accounts for 95'7,,. Kanthal has about
1050 employees world wide, in Sweden about 500.
Today Kanthal is organised in two business areas:
Kanthal Alloys and Kanthal Furnace products.
Our study concerns Kanthal Alloys, which has
about 300 employees in Sweden and sales of 550
million SEK. The production process includes
melting, rolling, drawing, annealing, etc. for
different alloys produced (mixed with iron, alu-
minium, chromium, nickel, etc.).
Kanthal is known from Case 190-002, Harvard
Business School, prepared by R.S. Kaplan. The
case is a part of Cooper and Kaplan [4]. Kaplan's
study describes the situation in Kanthal around
1987. Since then, Kanthal has gone through dra-
matic changes. Due to decreased volume in
demand, profits rapidly changed to losses. Kanthal
got new owners at the end of year 1991. In
Hallstahammar the number of employees has
decreased from 850 in 1990 to 450 in 1993!
Model lbr product costing
Direct material
Direct labour
Special direct manufacturing costs
Production overhead, variable
Production overhead, fixed
Manufacturing standard full cost
Sales and Administration costs
Standard full cost
Direct material is standard cost (in SEK/g) of
consumed component for the produced product.
More kilograms are produced than really con-
sumed, due to inevitable scrap fall in the processes.
Minimising the scrap fall is a key for efficient use
of the production facilities. Direct labour is stan-
dard operation time (including set-up time) for the
product multiplied with a standard labour
costs/'hour in the production machine. (If the prod-
uct is manufactured in several machines, each
machine's direct labour is cumulated.) Special
direct manuJ~tcturing costs consist of cost for
spools, packing, drawing tools and returned mate-
rial to melting (returned material is a negative
cost). The costs to be allocated are determined at
448 P. Alnestig, A. Segerstedt/Int. J. Production Economics 46-47 (1996) 441-457
the yearly budget process. Drawing tools are allo-
cated due to the wire diameter of the product (a
small diameter means higher costs). Different types
of spools have different costs. The metal value (alu-
minium, chromium, nickel, etc.) compared to pure
manufacturing value (direct labour, overhead, etc.)
is very high. Falling scrap can be melted again and
it has a scrap-value. Therefore, to present a cor-
rect and comparable product cost the scrap-value
is considered. Production overhead, variable are
defined as costs for supplies and electric power.
Production overhead, fixed are defined as costs for
production management, maintenance and rent.
Production overhead in intermediate cost centres
are allocated to direct cost centres according to the
amount of service performed. The costs in the
direct cost centres (melting, rolling, heavy draw-
ing, wet drawing, etc.) are allocated to existing
machines (manufacturing units) according to the
quantity each machine is supposed to originate
costs. The costs allocated to the machines are
divided with expected necessary machine-hours
(for the same period, next year), which gives a stan-
dard cost per machine-hour. Both a variable and
a fixed standard cost per machine-hour are con-
structed. For every product, the time required for
manufacturing in different machines is estimated.
This machine time multiplied with the machine
cost decides what share of production overhead
will be allocated to the product.
Sales and administration (SA) costs are the costs
from cost-centres for Finance, Administration,
Sales and Marketing and the costs for freights,
commissions, etc. Some SA-costs are directly
booked to the product group. (Kanthal Alloys
have 10 product groups). Remaining SA-costs are
allocated according to the amount the costs groups
are supposed to generate costs.
Kanthal is very interested in the profits and
losses per market and customer. The contribution
from different markets can easily be calculated as
sales minus manufacturing standard full costs. The
result of the market is the contribution minus the
allocated SA costs.
The SA-costs of different product groups are
allocated to different markets according to the fol-
lowing rules: (1) During the "SAM and Kaplan
study" in 1987 a complete analysis took place, to
estimate the cost per "order line" (every ordered
product in a customer order is an order line) for
different product groups. These costs were deter-
mined to be between 700-3000 SEK per order line.
Since the study, these order line costs have been
increased with inflation. The order line cost of the
production group multiplied by the actual number
of order lines (in sales during studied period) is
allocated to a market. (2) Some SA-costs are direct
costs and from the beginning booked to the caus-
ing market (e.g., a sales trip to Japan). Other direct
costs can be sales personnel in Hallstahammar for
a specific market. (3) From allocation 1 and 2, left-
over SA-costs, for a specific product group, are
allocated to different markets according to sales
minus manufacturing full standard costs. I.e., if the
market of Uruguay has 2°/,, of the contribution of
the product group it also is assigned 2% of the
remaining SA-costs.
2.6. Karlssons - A B A Karlssons M e k
Karlssons in 1974 realised that hydraulic valves
required good spools to give machines the
hydraulic power control ability the industry was
demanding for construction, handling and drilling
operations. Still, spools are the products and it
requires high performance to produce, when
finished ground fulfil an envelope of roundness and
straightness within 0.0025mm Karlssons is one
part, out of five, in a family owned concern. Sales
in 1993 were 20 million SEK and there were about
30 employees.
The price is based on market conditions. The
product is a very vital component in the customer's
production, therefore Karlssons has to maintain
close relations with their customers. Every order is
cost calculated and has its own price. Despite the
near relationship the customer is not aware about
the underlying product cost. The result of every
order is controlled, which gives information about
every customer's contribution to the profit.
Depending on the close relationships to the cus-
tomers the sales forecast is easy to predict. Last
year's sales and the sales forecast are similar. That
is a help in activity planning. Once a year
a budget is made and costs for the next year are
 P. Alnestig, A. Segerstedt/ Int. J. Production Economics 46 47 ~1996 ) 441 457
estimated. The machines are divided in production
sections and every section has its own cost of
machine-hour, Depending on shift work, one- or
two-shift, the costs per machine-hour have two
different values.
Direct material: A small part of the product cost,
about 10%, is direct material. In cost accounting,
to cover purchasing costs, a material overhead is
allocated. The purchasing prices are negotiated
regularly. Manufacturing overhead: The cost
accounting component to allocate all manufactur-
ing overhead on the products is machine-hour
costs, a separate machine-hour cost is established
for each production section. Direct labour is a part
of personnel cost which is an ingredient in the
machine-hour cost calculation. The experience of
previous outcomes is the main element for over-
head allocations, such as personnel costs (includ-
ing DL) and variable manufacturing costs (power,
maintenance, tools). Other fixed overhead allo-
cates in a conventional way (property costs are
allocated by area and so on). Depreciations are
based on acquisition values. The total cost of
depreciation is allocated to the several production
sections to create an appropriate cost per machine-
hour.
The work of product costing stops with the man-
ufacturing cost. That means the price includes a
mark-up, which covers costs for administratiom
cost of capital, costs for sales and profit, cost of
capital. A MPC-system, Monitor, is used for prod-
uct costing calculations. A complete inventory val-
uation is only necessary at year ends, because the
sales are quite stable over the time. In the future
the product calculation will be differentiated con-
cerning the variable overhead.
2.7. Outokumpu Copper radiator strip AB
The Outokumpu group has four main business
segments: Mining, Stainless Steel, Technology and
Copper products. The Finnish state owns 57% of
the shares in Outokumpu Oy, which is the parent
company in the group. Total sales for Outokumpu
is 15 000 million FIM and number of employees
about 17 000, half of it outside Finland and about
1600 in Sweden. Outokumpu Copper is divided
449
into four business sectors: Tube (air-conditioning
and refrigeration tubes as well as sanitary tubes),
Strip (radiator strip and electrostrip), Drawn prod-
ucts (wires) and Rolled products (sheets, strips and
blanks). Outokumpu Copper Radiator Strip AB
(OCRS) is a part of the Strip business sector.
OCRS has in Finspgmg (Sweden) production facil-
ities for melting, continuous casting and rolling of
copper and copper alloys. The head office, includ-
ing Marketing and Technical Service departments,
is located in V~stergts. Total number of employees
in Finsp'ang and V/isterg~s are about 400 and total
sales are about 900 million SEK (the amount of
total sales is very dependent upon the price
fluctuations of copper). OCRS manufactures strips
in copper and copper alloys in different breadth,
thickness and length for mostly radiators (and par-
ticularly car radiators). OCRS produces about
33 000 tons of copper strips yearly. The customers
to OCRS are placed all over the world. The prod-
uct price is separated into two parts: metal price
and Jhbrication price. The customer pays a metal
price, related to the London Metal Exchange
records for copper, the time the order was placed.
The fabrication prices are established in contract
negotiations based on the price from last year.
OCRS secures metal prices promised to the cus-
tomers by hedging affairs (through the Outokumpu
group) on London Metal Exchange. That is made
to prevent losses and profits due to changes of the
copper price. Outokumpu Copper's accounting
information systems keeps track of results from
manufacturing, trading and price changes on
inventories. The following scheme is not tk~r pure
product costing but rather tk~r measurement of
profitability' for customers and market regions.
Model.lbr pro&tot costin~
Region (e.g. Italy)
ISales tons I
Sales (over metal value)
Production costs
Packing
Freight
Other deduct
Contribution margin 1
Sales costs
 450 P. Alnestig, A. Segerstedt/Int. J. Production Economics 46-47 (1996) 441-457
- Rebate and L/C costs
- Credit costs
- Inventory costs
Contribution margin 2
Running the facilities at a near full capacity is a
worthy way to earn money, therefore a "tonnage
thinking" is common and it is natural to keep
records of sales both in currency and tons. Observe
that the material cost is not a part of the produc-
tion cost. The metal costs often exceed 50 70% of
total sales value and the metal price fluctuates,
therefore the metal value is separated from both
sales and costs.
For material and production control, OCRS
uses the program package BCPS. This computer
system contains a module for product costing,
which is used for calculating the production cost.
F r o m the budget, machine-hour costs are estab-
lished for different machines/production areas. For
every produced item, the time for production is
estimated (and checked) in different machines. The
operation time multiplied with machine-hour cost
decides what costs will be allocated to the prod-
uct. Production costs contain labour, repairs and
maintenance, lubricants and other supplies and
costs for Production Management. Packing costs
are standard costs for different types of packing
registered in cost tables. Likewise Freight costs are
standard costs to various addresses. The standard
costs for freight and packing are checked against
actual costs. Observe that for OCRS it can take
several months before the actual cost for a trans-
portation from Sweden to Taiwan is determined.
Other deducts are yearly discounts, etc.
Some sales costs are booked directly (and some
booked afterwards) to concerned market, e.g., cost
for marketing personnel for the Italian market bur-
dens the Italian market. Remaining sales costs are
allocated to different markets/regions according to
number of order lines for the market in question
related to total number of order lines for all mar-
kets. Rebate and L/C costs (cash discounts, costs
for documentary credits and letter of credits) are
directly booked to causing market. Credit costs are
calculated through actual accounts receivable dur-
ing the period (month) multiplied with an interest
rate. (Accumulating the monthly costs presents a
cost for the year) Many of the customers have spe-
cial terms of payment, it is therefore necessary to
consider credit costs for determining the market/
region profitability. For achieving service and
availability to the customer, even if they are in the
US, OCRS in some cases store its strips by the cus-
tomer. Inventory costs are costs for this "just-in-
time" inventory. The inventory costs are calculated
in accordance with credit costs, inventory during
the period multiplied with an interest rate.
Generally, OCRS strives to avoid standard costs
and instead use actual costs. The analysis of OCRS
per customer/region/market has started in 1993.
The experiences of this analysis are not yet
examined.
2.8. Segerstrgm & Svensson AB
Segerstr6m & Svensson AB (S&S) is a family
owned company with total sales of about 130 mil-
lion SEK and 150 employees. S&S produces (cold)
pressed sheets in steel and stainless steel for com-
ponents for mostly cars and micro-wave ovens.
S&S have production facilities for cutting, form-
ing, bending, welding and surface treatments.
Model Jbr product costing
Direct material
Purchased service/manufacturing
Material overhead
Direct labour
Production overhead I
Production cost I
Production overhead II
Production standard full cost
Sales and Administration costs
Standard full cost
Margin
Sales price
Direct material is the standard cost established
once a year when the budget is made. Costs
Jor purchased manufacturing are the supplier's
price per unit multiplied with the number of units.
The cost for material overhead is allocated to the
 P Alnestig, A. Segerstedt/Int. ,L Production Economics 46-47 (1996) 441 457 451

product by a burden rate on material cost.
Expensive materials (e.g., stainless steel) have a
lower burden rate than cheap materials. Direct
labour is the standard man-hour cost in the work
centre multiplied with estimated required man-
hours for production (from the routings). Costs for
production overhead I are allocated to the products
through machine-hour costs. For every product,
production time required in different work centres
cost determine what part of the production over-
head that will be allocated to the product.
Production overhead H is the capital cost for
work-in-process and costs for scrap. These costs
are allocated to the products by a burden rate
based on Production cost I. The sales and admini-
stration costs are allocated to the products by a
burden rate based on Production standard lull
cost.

Cost centres Segerstr6m & Svensson

Code Description Cost allocation

010 General Management SA ( = Sales and Administration costs)

020 Plant Management SA
110 Financial Administration SA
120 Marketing/Purchasing SA
140 Computer/Logistics SA
150 Process Design and Developm. SA
160 Quality Control SA
200 Production Management PO ( = Production Overhead)
211 Forming PO, Direct cost centre
213 Tools PO
221 Welding PO, Direct cost centre
225 Surface treatment PO, Direct cost centre
250 Inspection PO
260 Production Control PO
261 Dispatch/Supplies MO ( = Material Overhead), SA
270 Buildings/Central Store TO
280 Personnel Administration TO

(mostly machines) is estimated (and controlled). 2.9. Skultuna Flexible

Cost in indirect cost-centres (e.g., Personnel
administration) are allocated to direct cost-centres
(e.g., Forming). The costs in a direct cost-centre
are allocated to the different work centres in that
cost-centre. The allocations are performed accord-
ing to the quantity each cost-centre and machine
is supposed to consume and/or issue the costs. (A
work centre can embody a manual operation, one
machine or several similar machines.) The costs
allocated to work centres are divided with expected
necessary machine-hours (for the same period,
next year), which gives a standard cost per
machine-hour. Time both for set-up and operation
lbr the product multiplied by the machine-hour
Skultuna Flexible had 25 employees in 1993 and
the invoiced sales were about 60 million SEK. The
company produces laminates (2 5 coatings in
aluminium, plastic, etc.) for packing (chocolate,
coffee, cigarettes~ etc.) and industrial applica-
tions.
More than 60% of the costs for a customer order
is material costs. A small manufacturing value
means that the material prices and to order the
exact required quantity is important. Therefore,
the scrap fall is regularly followed up. Other costs
than material costs are in the short run viewed
as fixed. The used pricing policy, and model of
452 P. Alnestig, A. Segerstedt/Int. J. Production Economics 46 47 (1996) 441 457

product costing, is purchasing costs multiplied by man-hour, assembling time are important com-
a sales mark-up. ponents according to manufacturing operations/
The company has no inventory of finished goods assembling. Every year a programme including the
because it manufactures only customer orders. sales forecast, the resources of the organisation, the
Raw material inventory is valued by the purchase behaviour of competitors, etc. is established. This
price and work-in-process by the order value. programme is the basis of the manufacturing over-
Four persons bought the company in 1992, from head. However, the denominator for applying all
a rather large Swedish concern (Grfinges) all these fixed overhead is based on a normal volume. The
persons are today working in the company. There manufacturing overhead is divided into two ele-
is a model, left behind from the earlier owner. The ments, which means that the budget can be
model is of conventional art, a part of an MPC- adjusted for changes in volume.
system, with direct costs and overhead allocation The VME EP total costs are to be covered by
bases like machine-hours. This model is not regu- "Standard Cost, Product and Components".
larly used and therefore not presented here.
Model Jor product consting
Direct material
2.10. VME Industries AB, Eskilstuna plant Direct labour
Component, Subcontractor
The VME Group was a result of the merger in Manufacturing Overhead (MO)
1985 between Volvo BM, Michigan and Euclid. (including own purchasing)
VME Group produces a complete programme of
. . . . . . . . . . . . . . . . . . . . .

Material Overhead (MAO)

construction equipment. VME Industries AB, pre-
(from central purchasing)
viously Volvo BM, has activities in three locations,
Arvika, Eskilstuna and Hallsberg. The activities in Standard Cost (SC)
Eskilstuna, VME Eskilstuna Plant, are the subject Measurement/Quality
in this report. VME Eskilstuna Plant produces (Design department)
parts of the VME programme such as smaller load- Washing
ers, Volvo BM L50, Volvo BM L70 and excava- (Marketing department)
tors, Volvo EL 70. Some strategic components, Standard Cost (SC), Products and Components
transmission and axles, to other products sold by (Service department)
the group are a part of the production as well. Modifications
VME Eskilstuna Plant's sales in 1992 was 800 (Design department)
million SEK and the number of employees about Sales campaign
900. (Marketing department)
The VME Eskilstuna Plant (VME EP) uses cost- Machine-tools
based measures as transfer prices. VME Eskilstuna (Service department)
delivers only at standard cost their products inside VME Standard Cost
VME Industries AB. Any kind of profit depends Complaints, Customs
on variances entirely. (However, the market price (Service department)
affects the standard costs. Owing to keen compe- Standard Full Cost (SFC)
tition VME EP has been forced to cut costs and
rationalise its production.) Direct material: A predetermined standard
Because of the inventory valuation, two kinds of cost is used during the year. Variances in price
product costing are used. One including calculated and exchange are booked at the Purchasing
cost of capital and another without. Most esti- department. Direct Labour: A predetermined
mated figures in the model of product cost are basi- yearly standard cost based on estimated operating
cally from the annual budget. Standard cost per time (setup-time plus unit-time) and average
machine-hour, operating time, standard cost per cost per man-hour gives a direct labour cost per
 P. Alnest(g, A. Segerstedt/Int. J. Production Economics 46 47 (1996) 441 457 453

Table 1
Sales 1992/1993 MSEK, employees, products

Sales Employees Products

ABB Motors 420 340 Electric Motors (in aluminium)

ASSA 285 350 Lock systems and details
Avesta Sheffield CRD 1210 400 Cold-rolled stainless products
Denver Sala 175 250 Mining refinery equipment, pumps
Kanthal 550 300 Heating and precision wire
Karlssons 20 30 Spools for hydraulic system
Outokumpu CRS 900 40(5 Radiator strips (copper)
Segerstr6m & Svensson 130 150 Auto components, form pressed sheets (microwave)
Skultuna Flexible 60 25 Laminates for packing and industrial applications
VME Industries EP 800 90(5 Conslruction equipment (loaders. excavators, etc.)

c o m p o n e n t . Component, Subcontractor: A prede- studied vary from nearly h u n d r e d s to several t h o u -

t e r m i n e d y e a r l y cost is registered in the register o f
m a n u f a c t u r i n g o p e r a t i o n s . Manufacturing over-
head ( M O ) : C o s t centres are d i v i d e d into "indi-
rect" a n d " d i r e c t " categories. All o v e r h e a d s o f
direct p r o d u c t i o n cost-centres are t r e a t e d like vari-
able costs. Other, indirect c o s t - c e n t r e s ' (personnel,
financial, m a i n t e n a n c e , etc.) o v e r h e a d s are fixed.
Indirect o v e r h e a d is a l l o c a t e d to the direct cost-
centres a n d a l l o c a t i o n bases for this p u r p o s e is
m a n - h o u r s . T h e r e are a b o u t 200 " d i r e c t " a n d 50
"indirect" cost-centres. Material overhead ( M A 0 ) :
Costs related to central p u r c h a s i n g . T h e s t a n d a r d
rate used in cost a c c o u n t i n g is b o o k e d when the
p r o d u c t is finished. Overhead-Fixed mark-up:
G e n e r a l l y , o p e r a t i o n s such as m e a s u r e m e n t , wash-
ing, etc. (it is the last cost c o m p o n e n t c o n n e c t e d to
V M E Eskilstuna).
sands o f items (Table 1). F o r A v e s t a Sheffield a n d
O u t o k u m p u every o r d e r is a " p r o d u c t " (they
m o s t l y receive a similar o r d e r in the future but n o t
always).
The n u m b e r o f c u s t o m e r s (Table 2) to the c o m -
panies is difficult to find out. W h o is really the cus-
t o m e r ? O u r studied c o m p a n y delivers in some cases
to D i s t r i b u t i o n Divisions (often within their own
g r o u p o f c o m p a n i e s ) a n d Agencies, which in its
t u r n deliver the p r o d u c t to retailers, which in its
t u r n distributes the p r o d u c t to the real end user.
O u r m a n u f a c t u r i n g c o m p a n i e s are often a link
a m o n g others on the p r o d u c t s w a y f r o m raw mate-
rial to the tinished g o o d s for the real end user.
Electric m o t o r s , lock systems, p u m p s a n d refinery
e q u i p m e n t will not be used and c o n s u m e d before
they reach the real end user.

Table 2
3. Connections and comparisons Number of customers

Few >10 >10(/ >1001/ >10000

3.1. Size, products and customer
ABB Motors IC EC FE
In eight c o m p a n i e s , 50"/,, o r m o r e o f the p r o - ASSA EC FE
d u c t i o n is e x p o r t e d . T w o o f them, A S S A a n d Avesta Sheffield CRD IC FE
Denver Sala EC (FE)
S e g e r s t r 6 m & Svensson, e x p o r t 10%. In all o f the
Kanthal IC FE
c o m p a n i e s a great share o f the p r o d u c t i o n is initi- Karlssons EC FE
ated by c u s t o m e r orders. H o w e v e r , p r o d u c t i o n s to Outokumpu CRS EC FE
finished g o o d s i n v e n t o r y are a m a j o r p a r t in two Segerstr6m & Svensson EC FE
o f t h e m ( A B B M o t o r s (electric m o t o r s ) 80% a n d Skultuna Flexible (EC) FE
VME Industries EP IC (FE)
D e n v e r Sala ( p u m p s ) 67 %). D e p e n d i n g on the cus-
t o m e r o r i e n t e d p r o d u c t i o n the n u m b e r o f different (IC = Internal (within the own Group) customer, EC = external
p r o d u c t s per year p r o d u c e d in the c o m p a n i e s we customer, FE = Final end user)
454 P. Alnestig, A. Segerstedt/Int. J. Production Economics 46 47 (1996) 441 457

The types of computer system used for product (ROD [I0]. In financial accounting, the cost of cap-
costing by the different companies are listed in ital is not treated as a cost except interest on debts
Table 3. which is a cost when calculating net profit. In
Table 4 entries are marked with X if the compa-
nies in their model of product costing clearly spec-
3.2. Cost of capital and deprecations in product ify the cost of capital for different assets.
costing When it comes to depreciation, the Swedish
"Uniform principles" (1937) recommended depre-
According to the Swedish "Uniform principles ciation based on current actual values for the assets
of full costing" from 1937, the cost of capital is to and not (historical) acquisition values. All studied
be included in the costing scheme. The cost should companies consider depreciation costs on fixed
be calculated on all capital, all assets, in use and assets in their model of product costing; however,
with a rate of interest referring to the cost of bor- the behaviour differs according to Table 5.
rowing capital. (In the US, the cost of capital in
the 1930s was recommended to be excluded from
the full cost of products, probably because the 3.3. Allocations of overhead
inclusion of the cost of capital in product costs
make it more difficult to calculate the income figure The denominator for applying fixed overhead to
required to determine the return on investment products can be based on a year-to-year expected
activity based on current sales forecast Most of the
companies use this master-budget volume method
Table 3 according to Table 6. The denominator, based on
Type of computer system for product costing a normal volume, attempts to apply fixed overhead
by using longer-run average capacity utilisation.
ABB Motors Own, special
The main reason to choose the normal volume
ASSA Mapics method is that companies want to avoid variable
Avesta Sheffield C R D Own, special product costs due to short-time fluctuations in
Denver Sala Movex demand. They expect that over-applications in
Kanthal Ymer
Karlssons Monitor
years with above-average volume will be offset by
O u t o k u m p u CRS BCPS under-applications in years with below-average
Segerstr6m & Svensson Ymer volume.
Skultuna Flexible InStead The companies show an intention to allocate
VME Industries EP Mapics
overhead costs accurately. They prove an ambition
to reach a principle of cause-and-effect relationship

Table 4 Table 5
Cost of capital-management Depreciation management

Acc. Inventory Fixed Current Acquisition

receivables assets values values

ABB Motors X X X ABB Motors X

ASSA -- -- -- ASSA X
Avesta Sheffield C R D X X - Avesta Sheffield C R D X
Denver Sala X -- Denver Sala X
Kanthal -- -- -- K a nt ha l X
Karlssons -- -- Karlssons X
O u t o k u m p u CRS X X -- O u t o k u m p u CRS X
Segerstr6m & Svensson -- X Segerstr6m & Svensson X X
Skultuna Flexible X Skultuna Flexible X
V M E Industries EP X X X V M E Industries EP X
 P. AInestig, A. Segerstedt/Int. J. Production Economics 46 47 (1996) 441- 457 455

Table 6 Table 7
Master-budget contra normal volume Activity considerations

Denominator based on: Master-budget Normal volume Setup Tools Design Orderlines

ABB Motors X ABB Motors X X X

ASSA X ASSA X X
Avesta Sheflfield CRD X Avesta Sheffield CRD X X
Denver Sala X Denver Sala X
Kanthal X Kanthal X X X
Karlssons X Karlssons X X
Outokumpu CRS X Outokumpu CRS X X X
Segerstr6m & Svensson X Segerstr6m & Svensson X X
Skultuna Flexible X Skultuna Flexible X
VME Industries EP X VME Industries EP X

exist. In order to show this ambition four consid-
erable activities are chosen. Overhead allocation
for these activities is a traditional cost allocation
problem. The X-marks in Table 7 show whether
the companies consider the activities or not. I.e.,
if products receive different proportion of over-
head depending on their "requirement" of this
activity the activity is X-marked.
Ordinary allocation keys for these activities are
e.g., setup-time, experience (formally registered or
~guessed"), number of orders, etc.
3.4. Main purpose ~[" the model of product costing
The main purpose of the model of product cost-
ing is for pricing and inventory valuation. That
stands for all studied companies. Naturally, the
importance of these two purposes differs between
the companies. The pricing purpose is more impor-
tant for Karlssons than for Kanthal in the short
run. For Outokumpu CRS and Karlssons the
inventory valuation purpose is of lesser importance
than for the other companies, due to different con-
ditions.
If the companies need increased sales/produc-
tion volume they offer lower prices than they would
do otherwise. How they reduce the "price", what
costs they disregard, differ a lot between the stud-
ied companies, and it differs from time to time
within the same company. Therefore it is difficult
if not impossible to present a "pattern".
For investment decisions (new production facil-
ities, moving production facilities) the model of
product costing is mostly disregarded. A special
analysis is made for the investment. Make or buy
decisions are not common in the studied compa-
nies. Most companies seem confident in the strat-
egy: "such items we make, such items we buy".
4. Concluding remarks and extensions
The models for product costing in different man-
ufacturing companies have been presented. It is
hard to judge what production is just-in-time and
what is not. There are no sharp borders. Clever
production personnel and management have prob-
ably always striven after "just-in-time" production.
It is also hard to judge what is activity-based cost-
ing and what is traditional costing. In this investi-
gation we cannot say we have found a sharp
border. In the companies investigated, people
always try to do their cost allocations as logical as
possible, limited to available time and other
resources. Swedish textbooks [2] in product cost-
ing have for long propagated what can be called a
"proportionality theorem": one allocates costs
with a base for allocation such that, in short and
long terms it changes proportionately with the cost
that is allocated to the cost-centre. The same prin-
ciple is used with the allocation of costs from the
cost-centres to the cost objects. Activity-based
costing, ABC, focuses on "order depending" costs,
according to Johansson and Samuelson [2] which
is not a new conception in Sweden. The principle
of proportionality renders "traditional costing" in
Sweden to resemble ABC. However, probably we
all need trends and "tower lights" like ABC to
make us moving toward a better performance.
456 P. Alnestig, A. Segerstedt/Int. J. Production Economics' 4 6 - 4 7 (1996) 441-457
"Catalyzers", researchers and consultants, for this
process must eagerly point to the "light" to drag
us out of the "dark".
An interesting discovery of this study is the great
importance of the computer system for MPC
(Materials and Production Control). Such systems
mostly contain modules for product costing.
(Descriptions of a traditional program package for
MPC is e.g., presented in [11].) The modules are
mostly flexible, different companies using the same
computer system can have different product cost-
ing modules, but the flexibility is restricted. No
computer package for MPC in this study contains
a function for cost allocation according to number
of order lines, number of parts in an assembly, etc.
More activity-based allocation methods are
required in practical installations, because we have
noticed burden rates of several hundreds percent.
These can occasionally be correct and fair cost
allocations. Mostly it must be a signal that the
(Swedish) "proportionality theorem" is put aside
and a search for new and more accurate cost allo-
cations must be intensified. The real break-through
of new methods will occur when the computer
packages will offer them. (Today even companies
with great resources use standard program pack-
age for MPC, it is mostly too expensive develop-
ing such a huge and complicated system of their
own.) Then the ABC oriented cost allocations will
become a routine, instead of a special analysis
occasionally. All are available in the MPC pack-
age: items, product structures, lead times, number
of operations, order lines, sales to different cus-
tomers, etc.
Distinction between variable and fixed costs is a
tradition in Sweden. In the late 1940s and early
1950s the deficiencies with full costing were demon-
strated (in Sweden) and alternative methods based
on variable costing were presented. (Denver Sala,
Outokumpu CRS and in a way Skultuna Flexible
do not have full costing models, they have exam-
ples of variable costing models). According to
Samuelson [10], Frenckner [12] stopped the debate
by showing that it would be impossible to find o n e
costing method that would be most suitable in all
situations. Frenckner and Samuelson [7] argue that
it is possible to define one cost data system, they
call it a "total step-by-step costing system", that
can provide the user with different information for
different situations.
The ideas of Madsen [13] for cost accounting are
still applicable. His thoughts should be compared
with ABC [14], maybe he should be recognised as
a fore runner to ABC. Frenckner [15] points out
that fixed costs are left out in the ABC-model, one
gets the impression that all costs are variable, even
in the short run. Frenckner [16] says costs is only
one of the variables that create profit, cost drivers
should be compared to relevant "revenue drivers".
A development of ABC, according to the ideas of
Madsen and Frenckner, would be to make it able
to answer: What is the minimum price for what,
under current circumstances, we can offer this
product? That is an interesting extension for future
studies.
Hamel and Prahalad [17] say traditional com-
petitor analysis is like a snapshot of a moving car.
The same stands for a calculated product cost even
if it is made by a brilliant and sophisticated model
of product costing. If the strategic intent of the
company is wrong and unsuccessful the model of
product costing will not rescue the company.
Johnson [18] says that the importance of short lead
times, high quality, simple and efficient processes
in the whole company has often been forgotten in
cost accounting. Financial measures and profit-
ability analyses have been more interesting to look
at. Johnson [18] and Greenwood and Reeve [19]
show the importance of the underlying production
process concerning product and cost accounting
and that a rethinking comes. Nevertheless, a
proficient and successful strategic intent will
require guidelines from models of product costing
presenting as correct information as possible.
Acknowledgements
For this study we are grateful to the County
Administrations of S6dermanland and Vfistman-
land.
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