3. Purpose, advantages and pitfalls of costing techniques
As alluded in the introduction, the role and effective use of costing techniques may vary depending on a certain number of contextual variables and objectives. This section explores these variables and thus provides a critical assessment of the roles and uses of the techniques.
Economic rationale
From a public sector economic rational point of view, Bergman (2009) argues that marginal costing is superior to absorption costing to the extent that a public entity has access to tax revenues (i.e. subsidies) to cover for a large part of its fixed costs. This argument has resonance in sectors such as education or health. In France, where higher education is entirely subsidized, a debate has been launched by a new fee structure in a university where students are asked to contribute to their tuition. The rational is that education has both a public benefit (a more educated and thus productive society) and a private benefit
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This is particularly the case in centralized systems where managers have little say over budget.
Interestingly, the spread of New Public Management (NPM) in administrations (whereby the entrepreneurial behavior of managers has been favored, as well as the introduction of more market-based /private sector features in the public sector) has favored more decentralized systems where managers have an increase say over overheads. For instance, international organisations such as the World Bank have increased their field presence by opening country offices. Through effective decentralization, office managers have gained increasing control over overheads – ranging from decision on rents to office
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).
Managerial accounting is essential for decision making. Making the best choice depends on the manager's goals, the anticipated results from each alternative, and the information available when the decision is made (Schneider, 2012). The different techniques associated with managerial accounting are very helpful in the decisions that need to be made. In order to truly understand decision making with managerial accounting one must first discern exactly what managerial accounting means and some of the techniques associated with it. The definition of managerial accounting will be discussed along with the techniques of cost management techniques, budgeting, and quality control.
This paper provides a brief presentation of Activity-Based Costing methodology, how is used as well as its short comings.
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).
In college, Erik learned about an alternative costing approach called activitybased costing (ABC). However, the examples he remembered involved manufacturing firms. He wondered whether East Penn could develop an ABC system, with
Businesses – from manufacturing, merchandising and service industries alike – take careful considerations for their costing systems. Setting-up competitive prices in the market can be a result of proper costing methods. Misallocation of costs may lead to incorrect price estimates, continuous production of unprofitable products, and ineffective processing schedules. In this case study, we will discuss the costing methods Zauner Ornaments are currently using and upon conclusion, it will enable us to distinguish the advantages and disadvantages of each costing method.
INTRODUCTION Businesses – from manufacturing, merchandising and service industries alike – take careful consideration in the analysis of their costing systems in order to be able to set up competitive prices in the market. Misallocation of costs may lead to incorrect price estimates, continuous production of unprofitable products, and ineffective processing schedules. In this case study, we will discuss the costing methods which Zauner Ornaments have used or is currently using and, in conclusion, be able to distinguish the advantages and disadvantages of each costing method. CASE CONTEXT The case seeks to assist Zauner’s comptroller, Yu Chia-yi, in determining the best costing method for their overhead costs. In addition we also aim to
Traditional costing is based upon three main objectives. The first process allows, management to group costs by
The decision to implement a new or change a current product costing system requires a lot of research and pre-planning. In order to determine the most effective product costing system management must decide which costs should be included in the product costs, at what level will direct costs be tracked, how indirect costs will be structured, and when to capture the indirect costs. Once all the costs have been identified and organized into fixed, variable, or overhead categories, management must then decide which product costing system would provide the output information necessary for important business decisions.
One positive aspect of adopting the variable costing system that was described in the text, is some of the staff members do not seem to understand absorption costing, the current costing method. When using absorption costing, income is affected by sales volume and production volume changes. Variable costing may be more suitable for management who do not have a financial background. Because management needs to be able to make informed decisions, it is imperative that the financial information provided to them is meaningful.
One of the recommendations on the type of costing approach that should be employed that will help the Humble Patisseries Bhd to determine more accurate cost information for their pricing and product decisions is Activity-Based Costing approach. Activity-based costing is an approach to apportion costs in view of the measure of a product or service consumes. The application of Activity-based costing is mainly imperative to businesses that give customized products or services. A tailored production condition requires ABC's allotment of definite indirect expenses to a product to recognize its actual cost. ABC activities are employed for almost 20 years in which many companies in a array of sectors have executed activity based thinking.
Costing systems are part of the overall accounting system used by companies to measure sustainability performance and identify and account for expenditures accurately (Tatum, 2011). Three cost methods used as part of the decision-making process are Activity-based costing (ABC), Life-cycle costing (LCC), and Full cost accounting (FCA). The benefits and limitations of each in relation to sustainability efforts are examined.
Academicians as well as practitioners have long debated the issue of historical cost accounting versus current value accounting.
INTRODUCTION Target costing originated in Japan in the 1960s, though it remained a secret for years. Since the 1980s, however, when target costing was widely recognized as a major factor for the superior competitive position of Japanese companies, extensive efforts have been made to convey target costing to Western companies. Many large companies in North America and Europe have tried to adopt target costing to enhance their cost management and, thus, increase their competitiveness. Consequently, many variations of target costing have been developed and are being used in different countries. Since target costing, like many other management