The domination of financial accounting over product costing

This paper analyses Kaplan’s notion that financial accounting dominates management accounting in the context of whether it dominates product costing and if this is moderated by the methods used to calculate product costs and the types of cost system used. This is achieved by conducting 49 semi-structured exploratory interviews with management accountants in British manufacturing industry. The results shown that, in general, financial accounting does not dominate product costing. In particular, (1) When product costs are calculated using activity-based costing or direct costing, and if they are calculated using absorption costing by a cost system that is separate from the financial accounting system (FAS). (2) When a database system using absorption costing is used, provided the product costing system is sufficiently different from the FAS. (3) When operating units use absorption costing with a single system, and financial accounting information is regarded as being based on product costing information. In contrast, financial accounting dominates product costing when financial accounting is regarded as the main function of the accounting department. Contrary to Kaplan’s arguments, the selection of the method used to calculate product costs is not related to the dominance of financial accounting and is related to the need to produce good quality product cost information given the particular context of an operating unit.