PRODUCT COSTING

Product Costing- Absorption or Activity Based

Product Costing- Absorption or Activity Based Costing

Introduction

To be competitive in the industry and have an edge over the rivals in the market, it is significant for the producer to ensure that they utilize and manage their resources effectively. Companies need to compete on the basis of cost advantage by employing methods that will enable to reduce their cost of production and make it less than that of competitors that will them competitive advantage and be able to successfully survive the competition. It is important for the organization to identify the costs that are associated with the production and implement methods that will enable them to reduce these costs. They might want to know the cost of a unit, or producing a batch of unit, or the cost that is associated to one specific department. Product costing is related to managerial accounting, this accounting is specifically targeted towards managing the cost of production the units that are being produced (Weygandt, Kimmel & Kieso, 2009, Pp.165-169).

Product costing can be defined as costing that aims to serve management in an operational context rather than measuring the performance of the organization, however managing these costs will create a positive impact over the financial health and performance of the corporation. The foremost objective of product costing is to identify the cost of all the resources that are involved in production of one unit of good or service. Reporting these costs to the management is crucial in determining the price of the product it also ensures to assign the cost that are associated with the product, however they are cost of the supporting activities and do not vary with the number of units that are produced. Product costing is the method that tends to track and study all the expenses that are associated with producing the goods or services and simultaneously the expenses that will be involved in sale of it. the activity begins with identifying the cost of the raw materials that are purchased from the suppliers for the production and includes are the expenses that may incur until the product has been sold and has reached the final customers, this may also include the transportation cost of delivering the product (Drury, 2007).

In the early years costs that were associated with the product were only the manufacturing costs, later over the passage of time direct costing was introduced which divided the cost into variable cost, which varies with number of units produced and fixed cost that tends to remain fixed at all levels of output. However now with the technological advancements and the production process being automated the need for distinguishing between the cost and assign the cost to the products has become difficult for the companies and its management. With the production process being more automated it has become inappropriate for the firms to rely on older and traditional methods of absorption costing. This method accumulates all the costs including both variable and fixed costs for the production ...