This would allow the division manager set a higher selling price than variable costing system. The aim of their decision-making is to have profit maximization through each unit product. But absorption costing may lead to inadequate for managerial decision-making. Secondly, fixed overhead cost may hide in inventory cost. Since company allocated fixed manufacturing overhead on each finished unit in absorption costing, until the company sells a unit, the fixed overhead cost would not neither be record as expense nor show in cost of good sold.
An example, Shell a Gasoline production company or any beverage company may use process costing to track its costs to produce its beverages. Process costing involves the accumulation of costs for lengthy production runs involving products that are indistinguishable from each other. For example, the production of 200,000 gallons of gasoline would require that all oil used in the process, as well as all labor in the refinery facility be accumulated into a cost account, and then divided by the number of units produced to arrive at the cost per unit. Costs are likely to be accumulated at the department level, and no lower within the organization. Job Order Costing (Law Firm) Process Costing (Beverage Company) 1.
(Activity Based Costing) Introduction: Activity Based costing is the method of accounting that identifies the activities that are performed by the firm and then allocate the cost on the basis of the activities performed by the firm. ABC costing system is usually used in most of the manufacturing companies as it enhances the cost classification and made the allocation of indirect easy (Heisinger, 2009). ABC Costing system is used in product costing, customer profitability analysis and target costing. This present case is about the US Bright product company which produces cakes and pastries. They use Activity Based Costing as their costing system.
The Activity Based Costing is a costing model developed by professors Robert Kaplan and Robin Cooper of Harvard University in late 1980's as an alternative to the traditional costing system. Traditionally, the costs were assigned based on the volume of a cost driver, such as the amount of hours needed to produce an item. But this model did not allow to precisely assigning indirect costs. Changes in the economic world had important impact on the cost structure: the shorter life cycle of the products increased the costs linked to the conception and end-of-life stages, and the new production technologies increased the costs related to services. However, the overhead part of total costs increased, between 15% and 75% in most companies using machines
This form is usually filled as materials are taken from the raw materials inventory and utilized as part of the job; this is tracked by adding them to work‐in‐process. This is done in order to ensure that materials costs are correctly allocated to jobs in process. And important concept in Job Order Costing is Predetermined Overhead Rate. In order to save time and allocate cost as they are incurred, overhead costs are allocated to jobs in process using a predetermined overhead rate. The predetermined overhead rate is identified as part of the budget and planning process by estimating total factory overhead costs and dividing these total costs by the estimated total cost driver or activity base chosen by the organization, typically this can be something like Direct Labor Hours or Direct Labor
Question: 1 Activity based costing (ABC) is an accounting method which involves identifying the activities of a firm and assigning overhead cost to the products (activity based costing - ABC, 2015). This method is proven to be more accurate than traditional method which uses direct labor hours, machine hours or other volume based measures to assign indirect cost to products (Mowsen, 202). ABC costing allows companies to identify how much profit products are making and to eliminate unproductive activities. It recognizes the real cost associated with a product and thus makes it easier to fix correct price for a particular product. It helps in allocating resources to the products and services which are more profitable hence increase profitability
There are several functions and purposes of cost accounting. Although the income statement and the statement of cost of goods manufactured are valuable in guiding business decisions, they do not supply enough information to achieve the greatest efficiency and profit under competitive conditions. The figures represent total costs, or as my lecturer likes to call it, “too broad” to permit more than general conclusions. Alert management, interested in showing a larger profit, will ask itself vital questions that these totals cannot answer. The answers to such questions require detailed data based on computations that will pinpoint unit costs of products and processes.
First thing to achieve cost calculation according to the system was made in the U.S. Thus a system called “Activity Based Costing” has emerged. The main objectives of the ABC method are, highlighting as directly as possible the activities of the company to obtain value of the products and services. Second, analysing the activities showing the nature of activates, the place of the main causes that determine the increase of resources consumed. There are 3 cost drivers for each type of activity.
e) Is it costing pretty much than it ought to manufacture the product or deliver the service? f) How would we be able to do things all the more effectively? And g) Should we accomplish pretty much or even quit doing what we have been doing? At the point when arranging an Activity Based Costing System you ought to know that the system will require customary access to top notch operational information from the corporation’s HRM, Accounting, ERP, Sales, Transactional and Asset systems. This implies despite the fact that it can be hard to outline the ABC system to meet the business' necessities it is still far simpler to implement the initial Activity Based Costing system than it is to maintain it.
Cooper and Kaplan (1998) asserted that cost stickiness occurs when managers direct a supply of contract costs that is not cost-effective. The managers may decide to keep the all resources in the way; while a firm may report a decrease in revenue, costs do not decrease like revenue does. Several studies have found that the increase of cost is higher when the volume of activity increases compared to the cost decline during the volume of activity decreases (Cooper and Kaplan, 1998; Windyastuti and Biyanto,