COSTING TECHNIQUES

Costing Techniques

Product Costing

Introduction

Management accounting has been considered as essential methods for organization so that they can operate efficiently. The main areas of management accounting are related to the product costs. Hence, the purpose of the paper is to understand the nature and structure of their product costs. At this point, there are several costing methods devised and used, that depends on the need of the business. Each costing method leads to a different unit cost for the same product or object cost. But the most important aspect to consider in choosing one or the other costing method is the quality of the information generated by each

Scope of the Paper

The paper aims to critically compare and contrast the tradition costing method (absorption costing) with that of Activity Based Costing Methods. The study aims to review the relevant literature to highlight the merits and demerits of both the costing methods from the perspective of manufacturing situation.

Discussion

The prime organization to use management accounting in their accosting system were Manufacturing organizations. Therefore, as changes were taking place, the service organizations also implemented management accounting as the main methods for computing product or service cost. This was due to the complexity that was taking place in the organizations since new services and products were introducing in the market and customers demand were increasing as well. Accordingly, organization demanded for more information regarding establishing and preparing functional strategies in order to arrive at accurate discussion on product and services as well as on the cost of production.

Currently, new approached has been developed in order to allocate over-heads due to expansion on overhead of the organizations that represents a greater contribution of entire costs. Organizations utilized various main methods for cost allocation that comprises of marginal costing, activity based costing and absorption costing (Dury C., Tayle M., 2005, pp. 443).

Traditional Costing

Traditional costing method comprises of marginal and absorption costing was developed as soon as direct labour and direct material were much considerable product cost. Business used to employ such methods since they were only producing small series of products. Identical and sophistication product were used to produce in identical batched in which similar amount of cost were incurring. The allocations of cost by the business were 5% of indirect costs and direct cost were 95% (Brignall, Fitzgerald, Johnston, Silvestro, 1991, pp. 227).

Hence, this method was appropriate for those organizations that were producing identical product and services. In contrast, these day over-head cost is the main cost that incurred mostly for the costs of product and 5% cost was related to the direct labour. Moreover, the relation of overhead is not always with the volume drivers of machine hours or labour, as this could leads to the product cost distortion.

As it oblige different labour hours & machine hours, for instance, even though the product are similar, few batched may take more time or machine set-up may take much time. When ice-cream production takes place, due to different flavours, the time allocated to ...