Item Codes – Fundamental Understanding
There is a vast misunderstanding related to item codes and their use with accounting. Item codes serve two different purposes, one is to track types of sales and the other is track costs. It is best to categorize item codes into two subgroups of sales codes and cost codes. Both systems are pinned to the use of unique identifiers for parts of a larger product or service. With sales codes, customarily with retail, they are used to track sales of inventory items and their corresponding revenue generated. Think of inventory as a single product and the subcomponents are parts with item codes assigned. Cost codes are similar, they are used to breakdown the finished project or service into components for cost accounting or production analysis. Cost codes are most commonly used with cost accounting in the following industries:
- Professional/Contractual Service Firms
You will rarely find item codes in highly homogenous industries such as transportation, traditional service sector (cleaning, salons, food service) real estate, mining, agriculture, restaurants, media, utilities. This doesn’t mean they don’t use item codes, it just means that the use of item codes has less value related to cost accounting purposes or tracking of revenue. To appreciate item codes, the reader must understand both types and how they generate informational value. Other articles on this site in the accounting technology category will explain both types in more detail. Another article illustrates how item codes are used with construction to illustrate their respective importance.
Most industries use revenue codes to identify what was sold. For example a fast food restaurant will differentiate between a traditional burger and a chicken sandwich using a revenue code at the register. This code has no application in determining the underlying cost elements to prepare the entree’, it is simply used to determine the numerical count of the types of products sold. Item codes are used in cost accounting to track and compare the components of an assembly or a contract. Most basic accounting software programs such as QuickBooks, Sage and so on use the term ‘Item Codes’ for both purposes. Advanced accounting software programs will differentiate between cost codes and sales codes.
Item codes can be used with the service industry, but due to the nature of customized needs, they tend to be cumbersome and lack the flexibility needed in the service industry.
Do not confuse the use of item codes for financial accounting, item codes are strictly designed to assist management with evaluating sources of revenue and with cost (managerial) accounting. There is a difference, financial accounting is designed to evaluate overall performance, cost accounting is designed to evaluate actual results against a standard at the single unit level. ACT ON KNOWLEDGE.
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