PRODUCT COSTING

Meaning:
product costing is the backbone of a strong standard cost system. It is the process by which production activities are recorded at standard values and varience from actual costs are isolated.

Cost Elements of product costing

Direct costs
i. Direct material ii. Direct wages iii. Direct expenses

Indirect costs
i. Works or factory indirect costs ii. Administration indirect costs iii. Selling and distribution indirect costs

FUNCTIONS OF PRODUCT COSTING

Calculating
Changing Comparing product costs

Analyzing the bill of resources

BENEFITS OF PRODUCT COSTING

Ensures accurate development of costs
Provides a flexible tool for analysisnand sinulation Helps to project future costs

Provides multiple costs elements

Allows establishment of multiple costs types Provides optimal calculation of costs Ensures security of cost data

DEFINITION OF ACTIVITY BASED COSTING: ABC system calculate the cost of individual activity and assign cost to cost object such as products and services. On the basis of activities undertaken to produce each product or service.

 Terms Used In ABC : Activity : An activity may be defined as a particular

task or unit of work with a specific purpose. ex: placing of a purchase order, setting up of a machine , after sales service etc.
Cost object : It is an item for which cost measurement

is required. ex: a product, a service, a job etc. are cost objects.

Cost driver : It is a factor that causes a change in the

cost of an activity. Cost driver is of two types-resource cost driver and activity cost driver.

 Examples of cost drivers for various business functions:

Business functions Purchase of materials Cost drivers Number of orders placed. Number of receipts of materials. Number of inspections. Production Number of machine set ups. Number of units. Number of machine hours. Research and development Number of research projects. Personnel hours on a project. Complexities of projects.

Customer service

Number of products serviced. Number of service calls.

Number of hours spent on servicing.

 Resource cost driver: It is a measure of the quantity

of resource consumed by an activity. ex: number of purchase orders placed will determine the cost of purchasing the material.
Activity cost driver: It is a measure of the frequency

and intensity of demand placed on the activities by cost objects. It is used for assigning activity costs to cost objects consuming the activity.

Steps in activity based costing:

Identification of the main activities : Major

activities in the organization are identified.

Creation of cost pool: Cost pool is grouping of

individual cost items. A cost pool or cost bucket should be created for each activity. Ex: the total cost of machine set ups might constitute one cost pool for all set up related costs. factors that influence the cost of a particular activity is known as cost drivers. Ex: number of machine set ups, number of customer orders placed, etc.

Determination of the activity cost driver rate: The

 Calculation of the activity cost driver rate : Just as

an overhead absorption rate is calculated in traditional costing system, in ABC a cost driver rate is calculated by

Activity cost driver rate= Total cost of activity cost drivers Charging the costs of activities to products : The costs of activities are traced to products on the basis of demand by products.

 Advantages of activity based costing :

Accurate and reliable Better pricing decisions

Greater cost efficiency

Control of cost

Basic distinction Specific orders

Job order costing Job is performed against specific order. Each job may be different

Process costing Production is continuous.

Nature

Product is homogeneous and standardized The cost centre is a process.

Cost centre

The cost centre is a job.

Cost ascertainment

Costs are collected and ascertained for each job separately.

Costs are collected and ascertained for each process separately.

When cost are calculated?

Job costs are calculated only when a job is completed.

Process costs are calculated at the end of each period.

WIP

There may or may not be WIP.

There is always some WIP because of continuous production.

Basics difference Assumption

Activity based costing In ABC it is assumed that cost objectives.

Traditional costing In traditional cost accounting it is assumed that cost objects consume resources. In traditional cost accounting it is assumed that cost objects consume/uses resources. Traditional cost accounting is structured-oriented. Traditional costing system reveals less accurate costs. Lower degree of control is required because of homogeneous products and standardize process.

Uses

ABC uses drivers at various levels.

Orientation Accuracy Degree of control

ABC is processed-oriented. ABC is more accurate. Higher degree of control is required because of homogeneous job.

Transfer

There are usually no transfer from one job to another unless there is some surplus work.

The output of one process is transferred to another process as input.