Product Costing System is a management tool that identifies the actual cost of producing each product. Identifying profit or loss on each product, companies can identify and promote profitable products while dropping, redesigning, or repricing unprofitable products.
It is the process of identifying and allocating all the relevant expenses that are accrued in the production and sale of a product, from procurement of raw materials to transportation of final product to retail establishments. As John A. Lessner indicated in the Journal of Accountancy, "In today's hotly competitive business environment, accurate product costing has become critically important to a business's survival."
In older days the manufacturing processes were less automated than what it is today. In those days the costs were allocated only on the basis of material, labour & overheads, however in today’s world the production of a product has so many components and has an extremely automated production lines that there is little or no need to maintain component inventories; thus, the old costing formulas, which are still being used by many industries, are no longer applicable. In modern world the focus while manufacturing is quality, flexibility and meeting customer’s needs. This further complicates the old costing methods.
Now we will discuss the 3 methods which are primarily used under product costing methods:
Process Costing Method: This method of costing is used where the output results from a continuous or repetitive operations or processes and products are identical and cannot be segregated. This method is also used where a number of production processes are involved and the output of one process is the input to a later process, this continuing until the ﬁnal product is completed. Examples of industries where process costing might be applied are food processing, chemicals and brewing.
The advantage of this... [continues]
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