The Importance Of Having An Accurate Costing System And Its Effect On Decision Making

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Introduction Proper allocation of costly and scarce resources has always been a challenge to every organisation. In general, each and every firm would aim to maximise their gross profit by producing products that have high contribution margin or in other words, create items that have large proportion of profit out of each sales dollar after subtracting all associated costs. In order to know how profitable each product is, it is important for Gouna to have information about how much it costs to create an item. This report aims to identify the importance of having an accurate costing system and its effect on decision-making. First, it will discuss issues that Gouna is currently facing and suggest appropriate steps it could take to resolve…show more content…
Resolution Having a timely product costing system is essential for profitability analysis and strategic planning. Product costing is a methodology used to measure costs incurred in each production process and assign these costs to final products. It is mandatory to identify what costs should be included in this system as recording irrelevant costs will cause a massive impact in planning business strategies. Gouna will need to determine other relevant costs, besides purchase cost of raw materials, then the profitable and loss making units can be easily identified. It will then have the ability to decide which activities should be promoted or avoided and thus improve business performance and maximise its profit. Also, this system will help in pricing decisions. It is recommended that products or services are priced at normal selling prices. If items are under-priced, the company will make a loss when selling these items; if items are over-priced, it will drive customers to competitors that are selling the same item with a lower price. This system will help to raise awareness of determining an average selling price and is used in decision-making during tougher times. Idle activities can also be detected and avoided when implementing this system. It is important that all machinery are serviced regularly. This will help to minimise machinery breakdowns in the future and avoid unnecessary idle costs

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