Comparison of Product Costing Systems
Abstract
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.
Comparison of the Product Costing Systems
Prior to the Industrial Revolution, businesses were able to set costs based on the market prices of the local goods necessary to produce the product. The inventions of the Industrial Revolution laid the groundwork for products to be fully integrated under one roof which created a need for managers and executives to develop a way to control costs and create financial reports that were able to assist in day-to-day operational decisions. As manufacturing companies grew managers were faced with new economic problems such as (1) Managers requiring records of raw material supplies in order to control inventory (2) A system of tracking payroll payments that would lower the risk of fraud (3) A way to track the useful life of equipment and a way to track replacement items (4) A way to track variable and fixed costs that would aid managers in setting prices and (5) A way to track product costs from different periods (Garner, 1947). Modern day cost management techniques were born out of the struggle of early managers and accountants to find the most effective way to find solutions to the economic problems they faced. This paper will identify and compare the product costing systems used by management to identify the cost per unit during each stage of the production process.
The Basics of Product Costing
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.
Comparison of the Product Costing Systems
Prior to the Industrial Revolution, businesses were able to set costs based on the market prices of the local goods necessary to produce the product. The inventions of the Industrial Revolution laid the groundwork for products to be fully integrated under one roof which created a need for managers and executives to develop a way to control costs and create financial reports that were able to assist in day-to-day operational decisions. As manufacturing companies grew managers were faced with new economic problems such as (1) Managers requiring records of raw material supplies in order to control inventory (2) A system of tracking payroll payments that would lower the risk of fraud (3) A way to track the useful life of equipment and a way to track replacement items (4) A way to track variable and fixed costs that would aid managers in setting prices and (5) A way to track product costs from different periods (Garner, 1947). Modern day cost management techniques were born out of the struggle of early managers and accountants to find the most effective way to find solutions to the economic problems they faced. This paper will identify and compare the product costing systems used by management to identify the cost per unit during each stage of the production process.
The Basics of Product Costing
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