Product Costing systems (ABC, job costing, put costing, .) advanced topic managerial accounting the thesis statemenit a position body paper show evidence support position. The paper discuss opposite point view discuss position valid.
Product costing systems
Product costing system is a management tool which identifies the actual cost of producing each product. It identifies the profits and loss which can be gained or incurred on each product, hence giving companies the opportunity of identifying and promoting of profitable product while dropping, re-pricing or redesigning of unprofitable products Brierley, 2008.
Product costing is a highly sensitive area for managerial accountants, recently, most of them have changed their focus such that they give their attention to appropriate treatment costs which are directly associated with resources that are committed to support activities, which within the company do not vary proportionally to production once the initial capacities have been set. In such as an event, it is assumed that the cost of the committed resources has to be incurred irrespective of the actual usage and increasing the initial capacities to accommodate unexpected demand involves penalties above the normal costs Brierley, 2011()
According to Turner (1989) model of a decision maker, the accounting of a product cost is normally done in two methods; these are the absorptive and variable costing. Absorptive costing is calculated by taking the unit product cost and adding the unit variable cost to a unitized fixed cost component Turner & Hilton, 1989.
At this stage, the unit fixed cost is determined by dividing total fixed cost by a predetermined quantity that characterizes production capacity. Whereas, the unit variable cost, is determined by; dividing total variable cost at a particular production quantity at that quantity Drudy & M. Tayles, 2005()
In a survey conducted later after the introduction of Activity-based costing in the U.S., it was found that only 20% of the companies had adopted the costing system, but this was the highest among the other systems Park & Simpson, 2008.
Companies are still using other systems because of the scope and nature of information generated by different type of product costing systems. For instance, product costing may vary in their ability to provide information concerning revenue enhancement, performance measurement, and cost-reduction efforts among others. With the internal and external pressures, various companies' faces, one costing system may be suited to serve the needs of a certain business that another costing system Drudy & M. Tayles, 2005.
The prevailing factors such as complexity of the production process, nature of competition or frequency of operation at the company's capacity may determine the type of costing system to be used by the company.
Global competition is forcing companies to renew their commitment to excellent product production. The much attention given to the workforce improvement, inventory levels and quality of the product has provided a competitive edge for companies who would want to grow and become the key players in the industry. Though, in this modern world, outsourcing has made it easier for service/manufacturing environment to cost its production since costing in this case becomes more of assessment of the cost of acquiring the service Park & Simpson, 2008()
In the prior research done it has been shown that product-based costing is a less sophisticated costing system as compared to the activity-based costing system which is a more sophisticated system used by various companies. Though it has been found that these two product costing system have no significant difference between the two of them. Therefore, scholars have used the term sophistication to differentiate the two as it implies the method used to identify the indirect overhead costs with product costs Fisher & Krumwiede, 2012()
When making a decision concerning product cost, it is crucial that, the margin cost is first determined since an incorrect margin cost will lead to incorrect decisions in areas such as production of unprofitable products and the non-production of profitable products Fisher & Krumwiede, 2012()
In most cases, the actual product cost is unknown, therefore, scholars have it that, the more sophisticated, a product costing system is the more the chances of it being accurate, and this is quiet significant in the overall basis of decision making.
Low level of sophistication is defined by Dury and Tayles (2005) as "product costing systems with a single plant wide, first-stage cost pool and a single volume-based, second-stage cost driver" though this definition omits the makeup of the cost pools then they are presumably, the equivalent of both responsibility-based cost centers in a traditional costing system and activity cost pool in an activity-based cost system. In addition, increase in the number of cost centers in traditional costing system is likely to reduction in the level of diversity especially within production process in each cost center and lead to more accurate cost center costs. At the same time, an increase in activity cost pool in Activity-based costing is more likely to improve on the accuracy of the measurement of an individual activity cost pools. In both scenarios, a higher number of cost pools is expected to reduce the likelihood of cost pool resources by products Drudy & M. Tayles, 2005.
The extent to which the different cost drivers are used such as batch-level, product sustaining cost drivers, volume-level is also likely to be affected by sophistication.
Types of costing systems
There are various types of costing systems in use by different companies all over the U.S., these costing systems include; traditional costing systems, activity-based costing, variable costing, Process costing, Job-order costing, Back-flush costing, Operation costing and Lifecycle costing among others Fisher & Krumwiede, 2012()
Many surveys done to determine which of them is the best in computing the right cost of a product, the result always shows that each and every manager is somehow satisfied with the type costing system they use and they believe their costing system is the most effective compared to the rest. From my assessment, Activity-based costing system is the most effective method among the available costing methods and this research are meant to show why it is more effective in most business scenarios.
Activity-based costing system as the most sought system is an information rich costing system used by companies to perform activities which are value oriented within the company, unlike the case of virtual enterprise where value is added by partners. Activity-based costing is known to portray the actual product cost in complex environments. It is known to identify non-value-added activities and highlights sections where cost can be reduced substantially Park & Simpson, 2008()
Many emerging virtual enterprises are after the idea of seeking a new costing system and approaches which will look into the following; traditional costing system do not provide sufficient non-financial information existing product costing system are inaccurate, the current costing system do not encourage improvements and the overhead costs are predominant Fisher & Krumwiede, 2012()
Since product cost system is used to justify product pricing and capacity planning decisions, many manufacturing companies have over the last thirty years changed their cost profile. This is because production overhead and non-production overhead have increased significantly due to more resources being committed to the company. The cost profile has also led to changes in the management of production and quality, hence, improving on the value adding service they offer to the customer Brierley, 2011.
For instance, the complexity and cost of logistics and shipping have risen rapidly in the newly formed enterprises, especially those engaged in e-commerce. This makes product costing essential since it prevents them from making a poor decision, which might lead to them incurring losses.
Activity-based costing derives its cost decisions from the activities used in the production and delivery of the goods/products manufactured within the company then the various resultant costs are computed together. In comparison to the traditional system, Activity-based costing system provides the most useful information for cost management purpose since, the cost of the activities used in the manufacture of products is therefore assigned to that specific product in a way that approximates a casual relationship. In most companies, the Activity-based costing system in place is developed outside the financial accounting system that was intended to satisfy the management decision making Park & Simpson, 2008.
Therefore, in some companies, the Activity-based costing system' cost analysis has been restricted to direct material, manufacturing overhead costs and labor. Other sectors include marketing and distribution cost, research and development.
Activity-based costing is also the best system because it has been improved from only determining product profitability to finding out the profitability of marketing efforts and individual customers. In as much as Activity-based costing is one of the most adopted costing systems, it has its criticism too, one of its limitation is that many feel that the system is somehow overused by the accounting department who use canned software. It is also being criticized for not being strongly linked to performance evaluation and reward system or to quality and delivery strategies Fisher & Krumwiede, 2012()