Product costing systems in modern manufacturing organisations Product costing refers to the process of assigning shared direct and indirect costs to individual products, customers, branches or other cost items. (USAID, 2007) Product costing is also referred to as assigning costs to inventory and production based on the expenses that go into producing or buying inventory. It is an important process for manufacturers that helps improves management information on products and helps managers and the board members to take key decisions about product design, delivery mechanisms, and especially pricing.
There are several benefits of having a product costing done. These include Accuracy, Project Tracking, Decision-Making and Project Development. Accuracy: Accuracy defines how the expenses for the business is found through product costing. It also corrects inventory values through variable costing. Project Tracking: This basically means a keeping track of a project through by assigning costs for various stages and matching it to the success. Decision-Making: Product costing helps in decision making because these decisions often involve return on investment and how much profit a business can make from its sale.
Project Development: Creating new products involves the use product costing and is used by a company to plan and design new line of products or to recreate an old product with new features. (Lacoma, 2013) Manufacturing costs is also known as the cost to make a product. Thus it plays a major role in product costing. It is classified into three types Direct Materials, Direct Labor and Manufacturing Overheads. So basically Product costs are manufacturing costs. In a balance sheet the product costs are presented as Raw materials inventory, Work in process inventory and Finished goods inventory.
If we see the flow of these product costs it goes from the Direct Materials, Direct Labor and Manufacturing Overhead through Work in Process to Finished Goods Inventory and finally to Cost of Goods Sold. If we check an Income Statement the Product cost here is represented as finished goods and when they are sold it becomes cost of goods sold. (Jiambalvo) Job-Order Costing: Job-order costing is used by companies where goods are produced in distinct batches and there are significant differences among the batches (e. g. , airplane manufacturers and firms specially in custom manufacturing).
Example: Market researchers estimate that 100,000 small, no-name person computer manufacturers still control 25% of the market share despite the big, brand-name companies. Small PC manufacturers would use job-order costing systems to trace the costs of different systems they manufacture. This is basically for budget minded people and this gives them option of very good parts from various different computer parts. Batches termed jobs: In job-order costing, each distinct batch of production is called a job or job order. Costs assigned to distinct batches: this procedures involves assigning costs to each job.
The costs are then average over the units of the job or batch to obtain an average cost per unit. Service industries use quasi job-order costing: Procedures similar to those used in job-order costing are also used in many service industry firms, although these firms have no work-in-process or finished-goods inventories. (Product Costing and Job-Order Costing Systems, 2012) There are three types of modern manufacturing practices those are Just in time (JIT), Computer controlled Management and Total quality Management (TQM). Just in time (JIT): In this system a product is not made until an order is placed and is paid for it.
Some companies that use this system are Toyota, Dell and Harley Davidson. Toyota has great success in using JIT as their manufacturing strategy. They usually get in the raw material for the product only after an order is made for. No parts are allowed at a node unless they are required for the next node, or they are part of an assembly for the next node. This keeps helps Toyota to have less or minimum inventory in hand which helps them in various ways like less costs and also helps them to adapt to changes in demand with no worries.
The main success factors for Toyota from this model seems to be keeping less inventory at hand so that production can take place for any product. These parts are then replenished when they are used and accurate forecasting so that the right amount of stock can be stocked. (Wilson, 2010) Computer integrated manufacturing (CIM): Is a manufacturing philosophy in which the functions for the organization, from product definition to the disposition of the final product, are designed and integrated to achieve clearly enunciated organizational goals, most efficiently and effectively.
The coordination of the functions is achieved using computer, communication, and information technologies. (UYSAL, 2010) According to the U. S. National Research Council, it improves production productivity by 40 to 70 percent, decreases design costs by 15 to 30 percent, reduces overall lead time by 20 to 60 percent, and cut work-in-process inventory by 30 to 60 percent as well as enhances engineering productivity and quality. These statistics tells us that how important CIM is nowadays for most of the manufacturing industries. Koch) The importance of CIM in financing can be the software side where most of the data is fed in the computer and all the financing and accounting part today is done with the help of computers. It also helps in forecasting and prediction with the help of statistics and figures from previous years. Thus enabling a company achieving accurate figures and costing of a product. For example, Motorola has been using a computer-integrated process since 1988.
A Motorola sales representative takes an order, say for 150 black Bravo pagers to be delivered on May 17, types the order into a laptop computer, specifies the unique code that causes each pager to beep and requests delivery in two weeks. The order zips over phone lines to a mainframe computer in a new factory in Boynton Beach, Fla. The computer automatically schedules the 150 pagers for production May 15, orders the proper components, and, on the day after assembly, informs the shipping docks to express-mail them to Pacific Telesys Group (the company that ordered the pagers) in California. (Morrison, 2003) Total Quality Management (TQM): is an ongoing process; a way of thinking and doing that requires an ‘improvement culture’ in which everyone looks for ways of doing better. Building this culture involves making everyone feel their contributions are valued and helping them to develop their capabilities. (Planning for quality and productivity) For example, it is a key feature of Nissan’s way of working. TQM involves making customer satisfaction top priority.
Achieving high quality product and services is the main goal of a company using TQM and to achieve this, Nissan has to: In practical terms use TQM that involves, identifying customers and their requirements, establishing and using objectives (targets) for all areas of activity, basing decisions on researched hard facts rather than on hunches, identifying and eliminating the root causes of problems, educating and training employees. A cycle of Plan, Do, Check, Action becomes part of every employee’s thinking, because it represents Nissan’s way of working. (Planning for quality and productivity)
Technological advances in manufacturing enable firms to produce a range of products more rapidly and efficiently. As these changes also seem to affect firms organization and market structure. Product costing on the other hand as been a useful tool in modern manufacturing practice. All three of the modern manufacturing practices involves the usage of costing of a product to the right price. This enables a business to gain profits on their sale. These modern manufacturing practices if you put them together is just basically having the right amount of inventory, tools and providing good quality services.
If these elements were implemented in the product costing system the outcome would be a very positive one. As we can see many successful companies achieving greater profits by using them in their system. Bibliography Jiambalvo, J. (n. d. ). Job Order Costing and Modern Manufacturing Practices . Management acoounting . Koch, J. C. (n. d. ). COMPUTER-INTEGRATED MANUFACTURING . (J. Hal Kirkwood, Editor) Retrieved 01 19, 2013, from Reference for business: http://www. referenceforbusiness. com/management/Bun-Comp/Computer-Integrated-Manufacturing. html#b Lacoma, T. (2013). The Advantages Product Costing Offers in Financial Accounting.
Retrieved 01 19, 2013, from Chron. com: http://smallbusiness. chron. com/advantages-product-costing-offers-financial-accounting-24883. html Planning for quality and productivity. (n. d. ). Retrieved 01 20, 2013, from The Times 100 Business case studies: http://businesscasestudies. co. uk/nissan/planning-for-quality-and-productivity/total-quality-management. html#axzz2IoaXfIM0 Product Costing and Job-Order Costing Systems. (2012). Retrieved 01 19, 2013, from http://acct202. tripod. com/Chapter%203%20Outline. htm USAID. (2007). PRODUCT COSTING AND PRICING MANUAL FOR SACCOs . Retrieved 01 20, 2013, from http://www. said. gov: http://pdf. usaid. gov/pdf_docs/PNADK975. pdf UYSAL, O. (2010, 10 20). Computer Integrated Manufacturing . Retrieved 01 18, 2013, from Faith University: http://www. fatih. edu. tr/? lab,36&language=EN Wilson, J. (2010, 05 18). Real-Life Examples of Successful JIT Systems. (M. McDonough, Editor) Retrieved 01 19, 2013, from Bright Hub PM: http://www. brighthubpm. com/methods-strategies/71540-real-life-examples-of-successful-jit-systems/ Morrison, James L. (2003). Computer Integrated Manufacturing. Retrieved on Jan 23, 2013 from http://horizon. unc. edu/projects/OTH/1-2_tech1. asp
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