PRODUCT COSTING

Issue in Product Costing

Abstract

The topic covers an area of managerial cost accounting. The essay begins with an advent of managerial accounting and its determined use involved in cost management. It articulates an issue that is faced in managerial cost accounting where initially it provides a basic concept of direct, indirect and overhead costs and later discusses an issue by identifying the reason and factors that explains that tracing an overhead cost to product costing is relatively difficult than material cost and labour cost. In the end, it concludes by recommending activity based costing as an aiding tool in tracing overheads cost to product costing.

Abstractii

Introduction1

Discussion2

Product costing2

Issue3

Overhead Application4

Over/Under-Applied Overhead5

Conclusion6

References7

Bibliography10

Issue in Product Costing

Introduction

The concept of “managerial accounting” could be traced back to the period of mid-1880s. Research conducted in recent years has given an evidence of purposeful cost management throughout the British Industrial Revolution (Fleischman & Parker, p. 211). Agreeing with an improvement in techniques of capital accumulation, development in market structure and technology, it might have been anticipated that British entrepreneurs must have encouraged the benefits that costing could provide.

The application of cost management is observed in expenditure control; area of the responsibility and departmental cost management; allocation of overhead; comparing cost and transfers; decision making costs; standard costing and budget forecast; and lastly, in inventory control. Every business enterprise whether they are manufacturing, retailing or service firm requires knowing the information of the cost of products and services based on which the company set the price and computes the earnings and profit. For instance, the Wal-Mart success is highly based on their “cost leadership strategy” which restrains their small competitors from claiming themselves a competitor of Wal-Mart (Gregory, p. 54). Therefore, it is essential in managerial accounting to compute cost by developing an understanding in regard to cost behaviour and cost drivers (Babad & Balachandran, p. 563).

Cost behaviour is defined as the way costs response to changes in activity. These activities are called cost drivers which include the number of units being produced, the number of direct labour hours and machine hours. For instance, in delivery business the cost focuses on higher fuel cost due to long distance. In a restaurant or club, the number of hours it is opened it will be subjected to higher material, labour and utility costs. In contrast, increase in number of people attending an aerobic class in one room will keep the cost constant regardless of varying number of people. The cost behaviour illustrates the idea of variable and fixed cost (Hilton, p.1).

Discussion

Product costing

Product cost is also called manufacturing cost, they include: direct material, direct labour and manufacturing overheads. The costs that are assigned to goods produced are known as product costs. The product costs are recognised as “inventory” under the header of asset till the finished goods are sold and after they are sold it turns into an expense. The direct material costs are directly associated and easily traced to items produced for example all raw materials being used ...