COSTING SYSTEM & TECHNIQUE

Business Management Techniques for Engineers - Costing Systems and Techniques

Business Management Techniques for Engineers - Costing Systems and Techniques

Task 1

Appropriate Costing System & Techniques for the Company's Product

In a typical engineering business, it is essential that each product of the company should be designed to perform a particular function in an effective manner and withstand some operating conditions without failure during its whole useful life. Traditionally, engineers have tended to focus on such technical elements, while leaving the business part of the process on other associates and ignoring the consideration of downstream aspects that can impact on the usability as well as the cost of the product during its entire useful life. However, today, successful engineering businesses are those which understand that technical work is merely a part of the cost driven business process. So, we also acknowledged that a product which is a technical success will be judged a business failure in case costs are not analyzed and controlled. Therefore, we being an efficient engineering business, we have adopted appropriate costing systems and technique for our products keeping in mind various business functions.

Manufacturing cost is considered as the most complete measure of manufacturability of a product, since it anticipates the expenses that are associated with manufacturing a product. The process of cost estimations highly depends on a detailed layout of the various steps involve in the process, including manufacturing sequence; equipments; labor; and tooling needed to manufacture a specific item. Thus, in order to efficiently produce engineering products our business focuses on manufacturing cost, where, to estimate the costs associated with manufacturing we use Activity Based Costing method.

As our product is Clothes Drying Rack, we use ABC costing system to estimate the cost associated with its manufacturing while undertaking different business functions. This costing technique results in cost anticipations by routing parts through our production system and determines the actual cost of manufacturing Clothes Drying Rack, while focusing on every single detail and breaking down all of the overhead expenses involved (water, depreciation, supplies, maintenance, and others). So, in manufacturing settings of Clothes Drying Rack where volume-unrelated activities are important, ABC method facilitates our managers in understanding the relationship between operating activities that generate the overhead cost and the products.

ABC helps decomposing each functional area into its component activities, which are then grouped together for reflecting similarities of type or location, where, the consumption of the activities by the Clothes Drying Rack is measured by its associated cost drivers like the number of setups and the number of engineering change orders. Thus, ABC reveals a wealth of information about operating activities that can be utilized to eliminate excessive costs. For example, if we manufacture a batch of 50,000 units and produces 50 units per machine hour, then the cost assigned to the units with ABC as well as without ABC is given below:

With ABC

Without ABC

Manufacturing overhead for setting up machine

$500

$-0-

No. of units in batch

50,000

N/A

Mfg ...