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Uniform Costing: Definition & Example

Uniform Costing: Definition & Example
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  • 0:02 Definition of Uniform Costing
  • 1:29 Uniform Costing Example
  • 2:51 Benefits and Drawbacks
  • 3:41 Lesson Summary
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Lesson Transcript
Instructor: Beth Loy

Dr. Loy has a Ph.D. in Resource Economics; master's degrees in economics, human resources, and safety; and has taught masters and doctorate level courses in statistics, research methods, economics, and management.

This lesson defines uniform costing, takes a look at its use, and goes over an example using a trade association. You will learn about uniform costing books and examine its benefits and drawbacks.

Definition of Uniform Costing

Pretend ABC Construction is a large, global company that has billion-dollar firms as competitors. They, like many construction firms, are members of a trade association. Trade associations are groups formed by fees that companies in the industry pay so that standards can be set among members of the group. They establish guidelines for safety, union membership, and financial reporting.

ABC Construction is a member of the XT Trade Association. This is a global trade association that requires each firm to use what is called 'uniform costing.' Uniform costing is a financial practice that uses standardization to make comparisons across an industry or among the branches of a large business.

Uniform costing ensures that everyone is using the same methods to report financials. The most common industries required to use uniform costing are public utilities and industries that involve trade associations or receive federal subsidies (e.g., cotton, transportation, education).

Say we want to compare the costs of a school in New York City to a school in West Virginia. These two geographical areas are very different, as is the cost of living. The comparisons are meaningless if they don't use uniform costing. Both schools should therefore calculate costs using some type of standardization.

For a trade association, it makes sense that entities should report equivalent measures. Let's take profit as an example.

Uniform Costing Example

Uniform costing isn't a specific method that ABC Construction needs to use. It simply means that ABC needs to follow the managerial accounting method specified by XT.

Say there isn't a uniform costing method for ABC. There are several ways they can report profit. Two of the more common methods are:

  1. Gross profit margin - gross profit divided by revenue
  2. Net profit margin - net profit (total revenue minus all expenses) divided by revenue

We can see by the two formulas that comparing net profit margin to gross profit margin would be a useless comparison because of how costs are included.

For ABC, say the company has $150 million per quarter in gross profit margin. In millions of dollars, we would have 300/2 = 150.

Using the net profit margin, ABC would have (300-50)/2 = 125. By not using a uniform costing method, we could have a difference of $25 million per quarter.

Because ABC is a member of the XT trade association, there is a uniform costing book, which spells out the managerial accounting methods that must be used by members to determine profit. So, all members of the trade association are required to report profits using net profit margin.

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