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Agra Wal

Agra Wal

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Published by kalpana_mandhane

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Published by: kalpana_mandhane on Dec 05, 2012
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Product costng
Product costing is the process of tracking and studying all the various expenses that are accruedin the production and sale of a product, from raw materials purchases to expenses associated withtransporting the final product to retail establishments. It is widely regarded as an extremelyimportant component in evaluating and planning overall business strategies. As John A. Lessnerindicated in the
 Journal of Accountancy,
"in today's hotly competitive business environment,accurate product costing has become critically important to a business's survival."Product costing has undergone a dramatic metamorphosis in America over the past 50 years, as
Textile World 
's Frank Wilson noted: "In the 1940s, cost estimates normally included nothingmore than total manufacturing costs. In the late '50s direct costing was implemented to separatevariable [cost of materials, cost of transportation] and fixed [interest payments on equipment andfacilities, rent, property taxes, executive salaries] costs." Indeed, Lessner remarked that "fiftyyears ago, when manufacturing was far less automated than it is today, the costs of materials,labor and overhead were just about evenly divided. Now, production of a product's variouscomponents is often so synchronized on highly automated production lines that there is little orno need to maintain component inventories; thus, the old costing formulas, still used by manyindustries, are no longer appl
icable…. Further complicating the costing equation is the trend in
manufacturing to focus more attention on quality, flexibility and responsiveness, to meetcustomer needs. This makes production-line cost analysis more difficult because each linerequires small, but significant, changes in production techniques." As a result, today's managersand business owners have found that the limited information available through older job costingmethods is inadequate for making informed decisions in the contemporary business environment.With this in mind, companies have increasingly turned to detailed, long-range examinations thatprovide a more accurate representation of a product's true costs and benefits. "Companies arediscovering that their competitiveness is enhanced when purchasing, manufacturing, logistics,and product design groups begin using total life cycle costing," wrote Joseph Cavinato in
Chilton's Distribution.
"Total life cycle cost recognizes that the purchase price of an item is onlypart of its total cost, just the beginning of a series of costs to be accumulated by the firm, itsdownstream customers, and users until the end of the product's life." This analysis is furtherenhanced when companies include suppliers/vendors in the process, because the costing processcan help create a partnership relationship that enables both parties to move away fromcompetitive stances on pricing, delivery dates, etc., toward cooperative initiatives that optimizethe expense of creating and maintaining new products.
COSTS ASSOCIATED WITH MANUFACTUREDPRODUCTS
As
Chilton's Distribution
observes, there are myriad potential costs associated with selling aproduct which may be directly or indirectly linked to the actual production process. Possiblecosts include:
 
Developing and maintaining supplier relationships.
 
Transportation costs, including carrier payment terms; special charges in the realms of packaging, handling, and loading and unloading; and loss and damage expenses.
 
Product costng
 
Sales and freight terms that define payment terms, sales, and title transfers.
 
Payment terms
 — 
options here range from 15 days to as many as 90 days in someindustries, and letter of credit terms provide additional options. These options, statedCavinato, "often are not considered by managers in purchasing, traffic, and sales. Instead,most firms mandate these terms and they become 'boiler plate' in purchase orders, carriercontracts, and invoices. It can be mutually beneficial to negotiate these terms withsuppliers and carriers.
 
Costs to receive, process, or make ready, including unloading, counting, inspection, andinventory costs, as well as expenses associated with disposal of packaging and otherproduct protection/transportation materials.
 
Logistics expenses (warehousing, loading, unloading, handling, inventory control), whichare typically lumped together under the catch-all title "Overhead," despite the fact thatcosts for each of these can vary significantly depending on the arrangement.
 
Production costs accrued in actual manufacture of goods.
 
Warranty costs.
 
Quality costs, including costs associated with defective products (what percentage andhow far down the production line), inspections, product returns, chargebacks, cooperage,and storage.
 
Lot size costs, including inventory and cash flow costs associated with lots of varyingsize.
 
Supplier inventory.
 
Overhead costs of supplier and customer transactions, including billing, collection,payment preparation, and receiving processes.
 
Product improvement and modification, including costs of correcting defects andstandardization of materials and packaging.
 
Regulatory/environmental costs associated with meeting federal or state laws andcommunity expectations on environmentally friendly production and packagingprocesses.
PRODUCT COSTING IN MULTI-PRODUCTENVIRONMENTS
Some manufacturers distort true product costing results by evenly distributing costs for a certainaspect of production across all product lines, even though costs might vary with each specificproduct. In some instances, this practice might have little or no impact on a business's wellbeing; a company that is enjoying record growth and profits on all three of its product lines, forinstance, is unlikely to be seriously harmed by accounting practices that evenly dividetransportation costs three ways, even though one of the product lines may account for, say, half of the firm's transportation expenses. Huge profits mask such inequities fairly well. But relativelyfew companies are in such a luxurious position. Most companies
 — 
and especially most smallbusinesses, which typically have less margin for error than their larger cousins
 — 
need to work hard to arrive at true product costing figures. "As national and global competition increase,"wrote Lessner, "even tiny costing disparities can have an over-whelming impact on whether aproduct
 — 
or an entire company, for that matter
 —survives…. Over the longterm, product
profitability analyses that use these distorted costs cause management to erroneously assume

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