Costing Concepts



Costing Concepts

Introduction

Cost management is the process by which companies control and plan costs to manage the various costs of your business. Cost management is a comprehensive approach that includes the continuous cost reduction without being confined only to that. The planning and cost control usually is inescapably linked to the planning of revenues and profits. Cost management refers to the deliberate and systematic influence on the cost with an aim to increase the efficiency of the company. It is nothing new but a logical pursuit of the economic principle. A meaningful and quality driven management of business costs also results in an increase in shareholder value and represents a key competitive factor for the enterprise.

As costing is an important aspect of any business, choosing an appropriate costing technique is also essentially important. The costing method or technique is the set of specific procedures used for determining a cost. The cost model is the set of assumptions and basic relationships that sustain a method or technique of costing.

Scope of the Paper

The paper aims to highlight upon different costing methods available for the business. it will entail the use, merits and demerits of all the methods and present evaluated recommendations for the best methods to be used at SAC.

Discussion

Full Costing

In the early twentieth century, the costing methods used were total or absorbent costing methods. In full cost accounting, all costs are included in the manufacturing cost of a product for purposes of inventory costs and exclude all costs that are not manufacturing. This method is known as absorption costing or full costing (Benjamin, 2009). The basic characteristic of absorption costing system is the distinction made between product and period costs. Traditional methods allocate costs based on direct labor, material costs, income or other simple methods. It limits important decisions on activities that generate value to the final product (Dugdale, 2005).

This method is also combined with several disadvantages. Main disadvantage of full costing method is that in this method, the costs are allocated to the cost objects regardless of the cause of the costs. Full cost accounting also violates the principle of causation and often leads to operational mistakes. The full cost accounting leads to fluctuations in employment. Increased employment would surge the costs of the product forcing price increases and vice versa. Below are some of the most common disadvantages to this method (Dugdale, 2005).

When standards are reviewed frequently, its effectiveness in evaluating the performance weakens (Benjamin, 2009).

If the rules are not revised with major manufacturing changes, we obtain an inappropriate or unrealistic assessment.

Inflation constantly forces to change these standards.

In recent years, some sociologists have done studies that cast doubt on the value of standards as a basis for performance evaluation.

Studies argue that these rules are oppressive and create attitudes of resistance rather than acting as incentives.

In practice, it is very difficult to adapt to a specific conceptual structure due to the rigidity or flexibility and so the costs can not be calculated ...