Strength & Weakness of of Product Costing Systems in Modern Organisations

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The strengths and weaknesses of product costing systems in modern organisations 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to maintain component inventories; thus, the old costing formulas, which are still being used by many industries, are no longer applicable.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 system is that it is easier to use in comparison with the other cost allocation methods. As in today’s dynamic world, most of the companies have to be flexible when it comes to production, and a lot of processes are either added or deleted, the process costing helps the management accountants to track and allocate the costs accordingly. This process helps a company to determine selling price/unit by adding profit margin to profits. This method also enables a company to increase efficiency by pointing out the processes where cost is higher than budgeted. The disadvantages of this system are that by accruing all costs and dividing such costs on an average, it becomes difficult to determine the actual cost accrued to manufacture a specific variant. This method may cause unreasonable pricing decisions at times as it does not takes customization into account for individual orders. This system reflects historical costs instead of current costs, thus limiting the purpose of managerial decision making in modern organisations.

Job Costing Method: This method is used where goods and services are produced upon receipt of a customer order, according to customer specifications, or in separate batches. In this process as each job is treated as a unique job, the material & labour can be easily traced and allocated to the job. The overheads are allocated on the basis of allocation rate. This method is used not only by manufacturing companies, but also by service industry like hospitals, law firms, etc. This system is a complex one that is prone to error, but it does yield good information about production-specific costs. The advantages of this system are that it provides the management team with ready access to all the costs incurred pertaining to each completed job. This helps the management in doing a detailed analysis of costs to find why was the cost incurred and how can the cost be controlled to attain maximum profits. This method also provides ongoing results for each job...
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