Design of the Proposed Costing System
Though the problems faced by management differ from industry to industry and from company to company within the industry the costing system employed by the company would be able to provide the management the required information to solve the problems peculiar to the company. Some manufacturing companies produce one or more standard products where the manufacturing processes are fairly established. In such cases the company may like to know the cost of each process. In some other manufacturing companies the products may not be the same and will be manufactured only against customer orders.
No two products may pass through the same manufacturing process. In the case of these products the company may employ a job costing system to find out the cost of each job specifically. Thus, there are various systems of costing like job costing, batch costing, process costing, contract costing, marginal costing, standard costing and activity based costing (ABC) that are being used by different companies based on the nature of the activities of the companies concerned. Each system of costing has its own merits and demerits that determine the usefulness of the costing system that is being practiced by the company.
For the manufacturing company under study job costing system can be identified as the appropriate system of costing. Under job costing the cost object is an individual unit, batch, or lot of a distinct product or service called a job. The product or service is often custom made. Because the products and services are distinct job-costing systems can accumulate costs by each individual product, service, or job. In a job costing system, the company accumulates costs incurred on a job in all parts of the value chain like Research and Development, design, manufacturing, marketing, distribution, and customer service.
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The following are the general approaches to job costing: 1. Identify the chosen job cost object 2. Identify the direct cost of the job 3. Select the cost allocation base to use for allocating indirect costs to the job 4. Identify the indirect costs associated with each cost allocation base 5. Compute the rate per unit of each cost-allocation base used to allocate indirect costs to the job 6. Compute the indirect costs allocated to the job and 7. Compute the total cost of the job by adding all direct and indirect costs assigned to it.
Use and Relevance of Different Costing Techniques Apart form the Job costing the other systems of costing are detailed below: Process Costing In this system the cost object is masses of identical or similar units of a product or service. In each period process costing systems divide the total costs of producing an identical or similar by the total number of units produced to obtain a ‘per unit’ cost. This average unit cost applies to all the identical or similar units produced. The difference between job costing and process costing is shown below: Marginal Costing
Under marginal costing the costs are differentiated into fixed costs and variable costs before arriving at the contribution margin from each unit of production. The quantum of excess of the sales value over the total variable cost in respect of a particular product represents the contribution from that product towards the total profits of the company. In managerial decisions to decide on the continuance of a particular product or product line the contribution from the individual product or product line is of prime importance. The contribution minus the fixed expenses gives the profit of the firm.
The break even point represents that point of the quantity of production or sales in which the contribution equals the fixed expenses. At this point the firm is working on a no profit or no loss situation. The sales value at this point represents the break even sales volume. The main feature of the marginal costing system is that it does not take into account the fixed costs while determining the contribution from a certain product and therefore there will not be the chances of including arbitrary allocation of overheads and thereby vitiating the cost of a particular product.
The identification of marginal costs and the contribution from the individual products provide useful information for enabling the management in making decisions regarding the changes that the company can brought about in the volume of products to increase the profitability, changes that can be effected in the product prices, changes in the variable costs and the profitability of the different product lines. In the case of XYZ Plc the job costing system once introduced will enable the management to find out and analyse the profitability of individual products, as there are different products.