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identifies the actual cost of producing each product. Identifying profit or loss on each product, companies can identify and promote profitable products while dropping, redesigning, or repricing unprofitable products. It is the process of identifying and allocating all the relevant expenses that are accrued in the production and sale of a product, from procurement of raw materials to transportation of final product to retail establishments. As John A. Lessner indicated in the Journal of Accountancy, "In today's hotly competitive business environment, accurate product costing has become critically important to a business's survival." In older days the manufacturing processes were less automated than what it is today. In those days the costs were allocated only on the basis of material, labour & overheads, however in today¶s world the production of a product has so many components and has an extremely automated production lines that there is little or no need to maintain component inventories; thus, the old costing formulas, which are still being used by many industries, are no longer applicable. In modern world the focus while manufacturing is quality, flexibility and meeting customer¶s needs. This further complicates the old costing methods. Now we will discuss the 3 methods which are primarily used under product costing methods: Process Costing Method: This method of costing is used where the output results from a continuous or repetitive operations or processes and products are identical and cannot be segregated. This method is also used where a number of production processes are involved and the output of one process is the input to a later process, this continuing until the ¿nal product is completed. Examples of industries where process costing might be applied are food processing, chemicals and brewing. The advantage of this system is that it is easier to use in comparison with the other cost allocation methods. As in today¶s dynamic world, most of the companies have to be flexible when it comes to production, and a lot of processes are either added or deleted, the process costing helps the management accountants to track and allocate the costs accordingly. This process helps a company to determine selling price/unit by adding profit margin to profits. This method also enables a company to increase efficiency by pointing out the processes where cost is higher than budgeted. The disadvantages of this system are that by accruing all costs and dividing such costs on an average, it becomes difficult to determine the actual cost accrued to manufacture a specific variant. This method may cause unreasonable pricing decisions at times as it does not takes customization into account for individual orders. This system reflects historical costs instead of current costs, thus limiting the purpose of managerial decision making in modern organisations.
This system is a complex one that is prone to error. This helps the management in doing a detailed analysis of costs to find why was the cost incurred and how can the cost be controlled to attain maximum profits. and then allocate those costs to products based on how much of a particular activity is needed to produce a product. This method has little relevance in some environments. according to customer specifications. customers and other cost objects are only potentially relevant. Before making any significant decision using the data obtained from this method. Thus method enables costing of processes. For example. or in separate batches. and as it is done by human intervention. research. The advantages of this system are that it provides the management team with ready access to all the costs incurred pertaining to each completed job. At times this method becomes a hindrance in the process as overly detailed information if not connected well to the actions creates problems. rather than just the total cost. define the costs for those activities. This method utilizes the unit cost. instead of an identification post the job is over. . In this method the costs are assigned to specific activiti es such as planning. The disadvantages of this system are that overhead is usually allocated on rates that change almost annually. Reports generated by using this method do not confirm to GAAP (generally accepted accounting principles). Costs assigned to products. and makes visible waste and non value added activities. supply chains. This enables the management to analyse which products or services are profitable or visa-versa. law firms. etc. the material & labour can be easily traced and allocated to the job. This method is easier to understand and gives a better understanding of overheads. however at times fluctuations can cause over and under allocation of overhead costs to jobs during that period. any single mistake can result in ineffective results. which might misguide the managements decision. the soft ware industry has high development costs but almost zero direct costs associated with the sale of its products. The data obtained from this method can be easily incorrectly interpreted and must be used with care in the decision making process. but also by service industry like hospitals. In this process as each job is treate d as a unique job. Activity Based Costing Method: This method attempts to divide production into its core activities.Job Costing Method: This method is used where goods and services are produced upon receipt of a customer order. This method also provides ongoing results for each job which enables to management to take preventive measures in case of any unnecessary costs being incurred. The advantages of this method are that it gives a more accurate and reliable costing of different activities. and value streams. The overheads are allocated on the basis of allocation rate. This method is used not only by manufacturing companies. or production²and then the activities are linked to relevant products or services. This method also requires a lot of data entry work. managers must identify which costs are really relevant for the decisions at hand. but it does yield good information about production-specific costs. The disadvantages of this process are that the implementation of this method requires significant amount of resources.
referenceforbusiness.com/chapter%2020.com/process_costing_system.org/free_files/file1Pages%20from%209%20Process%20Costing.htm http://www. Above we discussed the 3 different methods of product costing systems being used in the modern organisations.---------Refrences: http://www.htm http://www.referenceforbusiness.futureaccountant.brighthub. however it also has applications in non manufacturing industries. and it is advisable that he management accountants of the company carefully choose the method which best suits their business and will help the managers to take effective decisions pertaining to the business.aspx http://www.download-it.accountingformanagement.com/small/A-Bo/Activity-Based-Costing.com/process-costing/study-notes/characteristics-features-application-industry.The product costing system is primarily used for manufacturing businesses. Each method has its pros and cons.pdf http://www. ----------------------------------------------------------------------------------------------------------------------------.com/small/Op-Qu/Product-Costing.php http://www.principlesofaccounting.com/office/finance/articles/100024.html http://www.html .
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