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Costing Systems & Techniques.
the emphasis is therefore on determining the final cost to the company. this method is used to prepare financial accounts. Whereas absorption costing typically spreads overhead costs across all items produced in a period. and profit is ignored by this method. The cost of these resources is calculated. volume (and type) of output and profit generated during the period. Also. for example) in financial terms. are charged to the produced “cost units”. As such. is that any decisions made on the back of this output will be based on historical. This is a method whereby all normal costs. due to low demand. The main advantage is that whilst sales fluctuate due to market trends such as seasonal change. The main disadvantage however. A further disadvantage is that marginal costing methods may lead to products being sold at a lower price if the manufacturer is operating at less than full capacity. The advantage of this method therefore is that its output is much easier to understand and can be used for planning and control of pricing/production levels. This method attempts to rectify the faults of absorption costing. by apportioning overheads to “cost units” in a more appropriate manner. including both fixed and variable overheads. as the value it gives per item is the total liability the company has incurred producing it. Once the marginal cost has been ascertained. as it largely ignores fixed costs and overheads. and apportioned to each project. this method shows a relationship between pricing of product. data. is the best method to use as regards the pricing of products. it is focussed on the controllable costs within the business. As such. causing the company to consume resources. unlike Absorption costing. The disadvantage of this of course. companies where a great diversity in product lines is seen or envisaged and or where production occurs in greatly varying sized batches. as any stock held is not undervalued. Due to this. As such. Activity Based Costing (ABC). not current. having a given unit value even though not sold. meaning that whilst it may be perfect for end of year/project accounts. ABC recognises that it is only certain activities that generate these costs. This is most useful in industries where manufacturing overheads are high. they are instead written off to be absorbed by the profit/loss generated during the period. customers may still expect to purchase goods at these low prices even after demand has increased. it is not very useful for planning future production. the contribution can be deduced – this being the excess of revenue generated over the marginal costs incurred during production. per unit produced and thus how much needs to be charged to recoup this value. This is a method whereby only variable costs and direct costs are charged to the produced “cost units”. Fixed overheads & costs are not. or treated as a liability. Marginal Costing. and translating indirect costs into direct ones. is that since it focusses on total cost incurred per “cost unit”. there is the is the danger that these costs may increase dramatically.Task 1 Job Costing Techniques Absorption Costing. without being noticed until period end. rather than the total costs as per absorption costing. it is not suitable as a long term costing method. or suddenly become variable. as the stock held is treated as an asset. This therefore. any relationship between cost per volume produced. item or batch produced in line with what proportion of these cost each has caused the company to incur. . a term used to describe the individual units produced (bolts. by tracing costs and overheads to the specific items/activities generating them. As this method includes all direct materials and labour. this method reduces the expected matching fluctuation in monthly net profit. despite production continuing unabated.
produced over a period of time. such as inflation. this technique treats the contract as a job. These cost levels may themselves be standard costs. the standard cost is assigned instead and sales begin using costs based on these estimates. . based on estimated or historical data. this method factors in batch production. As such. It is therefore a reactive. It also allows for set-up costs to be spread across future re-order batches. whereby all direct costs. all of the same type. then profits will be less than expected (an unfavourable variance). Whilst useful for a small number of high value jobs. each stage of the manufacturing process is costed.Standard Costing. are averaged to come to a per-unit cost. often due to the extended duration. not a pro-active control method. In process costing. to give the cost of all manufacturing involved in the production of the final product. it is based on out of date information. more complex jobs such as shipbuilding and civil engineering projects. thus tracking expenses incurred against the income generated by the job. that is assumed to be correct if expected efficiency and cost levels are met and represents a target cost for the company. here the product is repetitive and homogeneous. If actual costs exceed the estimated standard cost. the costs across all units. and is performed over a longer duration. these inform the management that actual manufacturing costs have strayed from those estimated and that the level of profit generated will be different than planned. This is the direct opposite of job costing. there are always variances between actual costs incurred. This costing method is primarily used where production is of uniform goods. or with a continuous output to meet a constant demand. Contract Costing. multiplying the relevant costs by the number of items produced in the batch. Batch Costing. For process costing. this would be unsuitable for continuous or batch manufacture. Advantages of this method are that it can be used as a means of staff motivation. Process Costing. As a result. this method is more usually used by companies with either only one product line. If the actual costs have been less than the standard figure. Another modified form of job costing. Simple method. A modified form of job costing. labour costs and manufacturing overheads. labour and overheads are allocated to a single job. then the variance will be a favourable one. however the downside to this is that whilst it can aid in efficiency. such as a coal mine or an electricity supplier. Additional Methods and techniques Job Costing. The standard costing method is based around a forecast unit cost for a product. rather than assigning the actual cost incurred to the product. There are usually more factors to be accounted for. and would be more applicable to one-off custom made items. This is used for larger. until the final product is reached. and the standard costs. and greater than expected profit levels will be the result. where costs are per job/per small order batches. and performance measurement against previous performance. estimates of a company's direct materials costs. and possibly occurring in high volume. Due to the nature of the output this is aimed at.
standard costing would be best. accurate standard costs should be available from previous years. and the wording of the brief.Reccomendation It is my belief that the best way for the target company to manage its finances would be to employ separate methods for each side of it's business. . I would recommend that for it's main business line of repeatedly batch-packaging pharmaceuticals. Due to the repeat nature of the business. Given this. the fact that contracted out design is expensive. I would suggest that simple job costing would suffice. that ongoing variance analysis will not show that great a departure from the standard costs evolved. and it is expected that as costs are mostly stable due to the (assumed) majority automated processes involved in the packaging business. For the small design projects the company runs as a sideline. the projects are small and do not involve any manufacture – only design. the cynical side of me wonders if the cost of these designs may not just be a ploy to make outsourcing the packaging of the pharmaceuticals look financially attractive to their customers' accounts departments. but to use Absorption costing for it's end of year accounts.
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