Product Costing System

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Product costing systems in modern manufacturing organisations

Product costing refers to the process of assigning shared direct and indirect costs to individual products, customers, branches or other cost items. (USAID, 2007) Product costing is also referred to as assigning costs to inventory and production based on the expenses that go into producing or buying inventory. It is an important process for manufacturers that helps improves management information on products and helps managers and the board members to take key decisions about product design, delivery mechanisms, and especially pricing. (Lacoma, 2013)

There are several benefits of having a product costing done. These include Accuracy, Project Tracking, Decision-Making and Project Development. Accuracy: Accuracy defines how the expenses for the business is found through product costing. It also corrects inventory values through variable costing. Project Tracking: This basically means a keeping track of a project through by assigning costs for various stages and matching it to the success. Decision-Making: Product costing helps in decision making because these decisions often involve return on investment and how much profit a business can make from its sale. Project Development: Creating new products involves the use product costing and is used by a company to plan and design new line of products or to recreate an old product with new features. (Lacoma, 2013)

Manufacturing costs is also known as the cost to make a product. Thus it plays a major role in product costing. It is classified into three types Direct Materials, Direct Labor and Manufacturing Overheads. So basically Product costs are manufacturing costs. In a balance sheet the product costs are presented as Raw materials inventory, Work in process inventory and Finished goods inventory. If we see the flow of these product costs it goes from the Direct Materials, Direct Labor and Manufacturing Overhead through Work in Process to Finished Goods Inventory and finally to Cost of Goods Sold. If we check an Income Statement the Product cost here is represented as finished goods and when they are sold it becomes cost of goods sold. (Jiambalvo)

Job-Order Costing: Job-order costing is used by companies where goods are produced in distinct batches and there are significant differences among the batches (e.g., airplane manufacturers and firms specially in custom manufacturing). Example: Market researchers estimate that 100,000 small, no-name person computer manufacturers still control 25% of the market share despite the big, brand-name companies. Small PC manufacturers would use job-order costing systems to trace the costs of different systems they manufacture. This is basically for budget minded people and this gives them option of very good parts from various different computer parts. Batches termed jobs: In job-order costing, each distinct batch of production is called a job or job order. Costs assigned to distinct batches: this procedures involves assigning costs to each job. The costs are then average over the units of the job or batch to obtain an average cost per unit. Service industries use quasi job-order costing: Procedures similar to those used in job-order costing are also used in many service industry firms, although these firms have no work-in-process or finished-goods inventories. (Product Costing and Job-Order Costing Systems, 2012)

There are three types of modern manufacturing practices those are Just in time (JIT), Computer controlled Management and Total quality Management (TQM).

Just in time (JIT): In this system a product is not made until an order is placed and is paid for it. Some companies that use this system are Toyota, Dell and Harley Davidson. Toyota has great success in using JIT as their manufacturing strategy. They usually get in the raw material for the product only after an order is made for. No parts are allowed at a node unless they are required for the next...
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