Product Costing Systems (ABC Thesis

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In addition, fixed costs are taken as a lump sum that should be covered with the products' contribution margin since there is no need of assigning indirect fixed costs to individual products. Unlike both traditional and Activity-based costing systems, variable costing avoids the problem of cost assignment that is present in the two systems. Recent research show that variable costing system is being used by 12% of the companies for their decision making process. The research continued that, variable cost was mostly used for short-term decisions, unlike for the Activity-based costing which is used for long-term costing projection Brierley, 2011()

Brierley said that, "If the problem is small enough so that contribution margin analysis is relevant, then it can't have a particularly significant impact on a company. And in any chance, the impact in a decision setting is paramount, if it can actually affect a company in a major way, and then it's silly to consider most of the factors to be fixed." Brierley, 2011()

Variable costing has also been supported in areas where the overhead does not vary with units, products, customers or batches. "This occurs in capital intensive environments where a significant part of the overhead structure is machine depreciation, not labor related overhead. Many paper companies also treat direct labor as fixed because the workers remain on site during downtime slack periods of production." Brierley, 2010()

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Traditional costing system as one of the costing system majorly focuses on direct materials, manufacturing overheads in their determination of product cost and in direct labor. In traditional costing system, the assumption is that the overhead is assigned to an individual products while putting in consideration the plant-wide overhead rate, although many different companies which have adopted it may decide to compute various department overhead costs.

Thesis on Product Costing Systems (ABC, Job Assignment

In addition, there is hardly any casual link between the manner in which overhead is assigned, and the immediate production process, rather, the overhead is assigned in relation to the number of units given out or the that of machine or labor hours consumed in the production process. Criticism over this type of costing system indicates that it is likely to over-costs simple products which are produced in smaller batches. It also over-cost products that majorly deal with high usage of allocation base, which include; labor hours, but low usage on factors such as machine hoursFisher & Krumwiede, 2012.

The mismatch between the way cost are summed up and overhead is assigned is majorly salient especially when the production process is more capital intensive, but the overhead allocation is based on labor hours. Further, critics say that the improperly applied overhead results to inaccurate product costs that lead to inefficient product continuation and pricing decisions Drudy & M. Tayles, 2005.

Therefore, this makes it, not the ideal costing system to be used by most companies.

Conclusion

All in all, variable-cost, traditional cost and Activity-based costing systems all use material cost as product cost. They only differ when it comes to computation of other costs. Activity-based costing is known to be the most sought costing system since it offers information which is mostly useful in cost management, so as to enhance on their profitability; to deal with capacity issues, to become more accurate in assigning the cost linked to the prevailing high levels of operating complexities, and to develop more appropriate pricing schemes.

References

Brierley, J.A. (2008). Toward an Understanding of the Sophistication of Product Costing Systems. [Article]. Journal of Management Accounting Research, 20, 61-78.

Brierley, J.A. (2010). The determinants of overhead assignment sophistication in product costing systems. [Article]. Journal of Corporate Accounting & Finance (Wiley), 21(4), 69-75. doi: 10.1002/jcaf.20597

Brierley, J.A. (2011). A Comparison of the Product Costing Practices of Large and Small- to Medium-Sized Enterprises: A Survey of British Manufacturing Firms. [Article]. International Journal of Management, 28(4), 184-193.

Drudy, & M. Tayles. (2005). The British Accounting Review Explicating the design of overhead absorption procedures in UK organizations, 37(1), 47 -- 84.

Fisher, J.G., & Krumwiede, K. (2012). Product costing systems: Finding the right approach. [Article]. Journal of Corporate Accounting & Finance (Wiley), 23(3), 43-51. doi: 10.1002/jcaf.21752

Park, J., & Simpson, T.W. (2008). Toward an Activity-based costingsystem for product families and product platforms in the early stages of development.… [END OF PREVIEW] . . . READ MORE

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