Potential Sources of Error in Direct Costing When budgeting for the future as well as estimating costs for production of goods in the present there is a need to assess the prices of the direct inputs. The direct costs are those which are directly incurred as a result of production and can be completely attributed to that production. These costs will include materials, labor and other expenses such as power. The process of costing may appear simple; to calculate the direct costs and then allocate the indirect costs. However, while the concept may appear simple, the practice can be difficult with a number of potential sources of error which may lead to wrong assessments. The first potential error is a simple pricing error. This may include calculating the cost of direct materials based at today's price for future purchase when the price is not guaranteed. Even where there has been a history of stable prices, there will increase at some point. For forecasting direct costs there is a need to assess the future costs, the further ahead the forecast the greater the chance for a price change. Most cost forecasts will make an allowance for inflation. However, inflation is difficult to predict; economists that specialize in assessing economic performance find this problematic, so it is unlikely a firm will be able to assess this accurately (Cao et al, 2012). There is an additional complication; inflation will not be felt uniformly across all sectors of the economy, even if a
This report will provide insight on what your management team should do concerning production costs. We will examine 2 different scenarios and provide our decision as to which makes most sense. In the first scenario, the total fixed cost of the production is 1,000,000. In the second
If the estimations in a budgeting process are poor, the organisation and the customers may suffer.
On the other hand, direct costs represent labor, materials, equipment, and sometimes subcontractors. They are assigned directly to a work package and activity. When project durations are imposed, such as in the racing sailboat project, direct costs may no longer represent low-cost, efficient methods. As detailed in the crash cost list, costs for the imposed duration date will be higher than for a project duration developed from ideal normal times for
It is a remarkable reality that the traditional costing systems use a solitary, volume-based cost driver. This is the motivation behind why the traditional product costing system misshapes the expense of items or products. By and large, this kind of costing system appoints the overhead expenses to items on the premise of their relative use of direct work. Thus, traditional cost systems frequently report incorrect product costs. The issue is in the basic technique of the traditional costing systems. They stick to the supposition that items reason cost. Every time a unit of product is produced, it is expected that cost be brought about.
According to Epstein and Buhovac, (2014), costing system is a process designed to monitor the costs incurred in a certain business. Costing systems are meant to advise the management on how to choose the most appropriate course of action with cost efficiency and capability. According to Cardinaels and Labro (2009) costing system provides detailed cost information needed by management needs to control current operations with the aim of improving the future. Below are some of the costing systems that are common to many organizations (Epstein & Buhovac, 2014).
Appendix 2: Estimation of Direct material, Direct labor and Variable Costs for the New Budget
Direct material costs change due to the quantity, range, quality and price of materials required according to the specification for the order each time a unit of the product or service is produced. Direct labour costs are driven by the number of hours required and the rate per hour each product unit that has been set for each labour grade.
Overall Theme We will explore fundamental assumptions of cost functions and discuss the relationships between cost behaviour, cost estimation and cost prediction. The concept of cost driver analysis and its application to cost estimation and cost management will also be discussed. We will also describe how to estimate cost behaviour using managerial judgment, engineering methods and other quantitative techniques.
This article discussed variable costing, what is primarily used for and applicability in manufacturing situations. Cost accounting supplies management with the necessary information for decision making (Hasan, 2016). The appropriate costing of a product is essential in taking appropriate managerial decisions (Hasan, 2016).
Various terms are used to describe costs. Having an understanding of these terms will provide a better insight to managers and companies on making budget decisions, efficiently. Not only the ones described above should be considered, but also all types of costs related to the decision in effect. Efficient managers will considered all aspects related to the analyses in question.
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Cost analysis: fixed versus variable costs direct versus indirect costs; traditional costing and activity based costing
Would factory security and assembly activities be best classified at an appliance manufacturing plant as unit-level, batch-level, product-level, or organization-sustaining?
The current method of apportioning production overheads based on direct labour hours can be described as a traditional approach to product costing. In a manufacturing company’s financial statements, each item produced must be allocated some of the production overheads to make the statements compliant. Sometimes the individual costs of these items can be calculated incorrectly based on overall production overhead and the system of allocating in place, however the overall financial statement can still be accurate. This traditional method of allocating the production
During the 1980s the limitations of traditional product costing systems began to be widely publicised. These systems were designed decades ago when most companies manufactured a narrow range of products, and direct labour and materials were the dominant factory costs. Overhead costs were relatively small, and the distortions arising from inappropriate overhead allocations were not significant. Information processing costs were high, and it was therefore difficult to justify more sophisticated overhead allocation methods.