Products Costing System

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Contents

Executive Summary…………………………………………………………………….. Page 2

Introduction………………………………………………………………………..…… Page 3

Analysis Part A – Conceptual Issues…………………………………………………… Page 4

Analysis Part B – The Practical Application to Sunflower Ltd……………………..….. Page 5

Reflective Learning………………………………………………………….................. Page 6

Conclusion …………………………………………………………………………..…. Page 7

References ……………………………………………………………………………... Page 8

Appendix……………………………………………………………………………..… Page 9

Executive Summary
Dear Mr & Mrs Izsmart,

We acknowledge that Sunflower Ltd is a large public company, reputable for its diverse range of flowers and large customer base. At present, we have identified that there is no formal product costing system implemented in the company – with the exception of the calculation of product costs imperative for external financial reporting purposes, prepared by your company’s accountant. In order to reduce cost pressures upon Sunflower Ltd, in the highly competitive flower sector, this report recommends the introduction of management accounting into the company, in particular the use of product costing systems. The purpose of this report is to identify an appropriate product costing system that will enable Sunflower Ltd to reach optimal efficiency as well as to justify each costing system that may be applicable to your company. We will additional outline the potential benefits that your company may gain as a result from adopting an suitable product costing system.

After much research and deliberation, we, as consultants, recommend the implementation of the hybrid costing system, operation costing as being most suitable for a large growing entity such as Sunflower Ltd. However, we acknowledge that due to some service aspects in the firm, activity based costing may be used as an alternative, but we will leave that decision to you.

Yours sincerely,

Introduction
Every organisation wishes to manage resources more effective and efficiently and consequently create or enhance customer value and shareholder wealth. Through the use of management accounting, these objectives can be achieved, though this report will only focus upon one aspect of management accounting - product costing systems. Product costing systems provide crucial cost information facilitating managerial decision making and their ability to plan, manage and control resources effectively. The way in which a costing system is designed should stem from manager’s needs and how they decide to use the information.

This report will capture the general case for product costing systems and the many benefits garnered from implementing a costing system. At two extreme sides of the continuum exists two types of costing systems, namely job costing and process costing. In practice, a hybrid, or mixture of both costing systems operational costing is also used and may be the key product costing system that is most appropriate for Sunflower Ltd. Additionally, activity-based costing model may be used as a substitute, in order to take into account the services Sunflower provides as well its flower products.

Analysis Part A – Conceptual Issues
Product costing systems are imperative for organisations for not only external financial reporting purposes, but additionally to assist manager in making optimal decisions for resources to create customer and shareholder value. Langfield-Smith, Thorne and Hilton (2009) define a product costing system as a system which aggregates all product-related costs and uses a series of techniques to allocate these costs to the organisation’s end products. These product-related costs may include upstream and downstream costs along the value chain in addition to manufacturing costs.

Benefits
Managers benefit from knowledge of product costing information by making effective short and long term decisions. Aside from the basic requirement of all firms to value inventory by manufacturing costs for external...
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