Research Articles Base: Costing Of Products

Costing of Products

Cost is a very important aspect of a business and it is where the profit of a company is based. It is basically a measurement, in monetary terms, of the amount of resources used for the purpose of production of goods or rendering services. For example, in manufacturing a personal computer, the resources needed such as materials and labor as well as resources for transporting and delivering the product to consumers all have cost which will comprise the cost of the PC. Included in the cost is the profit which is the main reason for the existence of the business. Because of the factors that affect the costing of products, the choice of a costing system is necessary in a company. It serves as a control method for cost awareness and for improving production performance. The focus then of this paper is about costing system specifically the standard costing system. The paper discusses first the functions of a cost system and why companies need a cost system. Secondly, the paper tackles the standard cost system and its advantages and disadvantages in relation to globalization, shorter product life cycle and the changing consumer behavior. The paper also discusses other costing system that are currently used in the industries to determine where countries or part of the world the standard costing system is more relevant and when it should be used more effectively. Functions of Costing Systems             According to Drury and Tayles (2003), companies need cost systems to perform a number of different functions which include (1) allocating costs between cost of goods sold and inventories for periodic internal and external profit reporting; (2) providing relevant cost information to manage the cost and mix of activities, products, services, locations and customers; (3) providing economic feedback to managers to manage costs and improve efficiency and effectiveness of existing operations; and (4) providing relevant information to manage the cost and mix of future activities.             Based on its functions, costing system directly influenced the activities of a company especially a manufacturing company.  Costing system determines if an activity does not provide profitability to the company or an alternative activity will provide more profit. For example, as stated earlier, the final cost or the price of a product comprises of different costs such as direct material, direct labor, and overhead, when a company analyze and review cost information, the management find out that outsourcing will yield to more profit thus cost system helps in determining which activity or mix of activity will be of greater importance in the part of the company. Cost system helps determine which activity can be eliminated or added for future business, when and how a company can impose cost reduction and how to improve efficiency of existing operations. The Standard Costing             Most Western and American companies are the ones to use standard cost system at present. Profit motivated companies seek to reduce costs and expenses in the process of manufacturing and marketing of their products or performing their service to the customer (Lewis, 1993). In order to reduce costs and expenses, and control method in costing, there must be a basis for comparison which is referred to as benchmark (F.S.P. et al,, 1983) or standard (Lewis, 1993) that can be used to signal when deviations from predetermined results are incurring, whether it is a performance or requirements. Standard costing is basically the process of setting cost performance goals that benchmark desirable performance and then using these cost goals to evaluate performance (Prentice-Hall, 2000).             Standard costing involves setting expected cost levels for each period by cost category such as the direct material, labor and overhead costs. This means that although the company pays for the actual costs, its inventories and cost of goods sold will depend on the standard cost set by the company. The difference between the actual cost and the standard cost is called the variance (Accounting Coach, 2006).  In standard costing the price or rate standards and the quantity or efficiency standards are the two standards that are considered. Price standards like the raw material cost standards are derived from economic forecasts which are based on the average historical costs (DBN, 2006) while the quantity or efficiency standards like the labor efficiency or the number of units that must be produced are based from engineering studies or product design specifications (Irwin, 2003).             Standard costing serves as a valuable management tool. The variance mentioned above is use as a tool in determining if the company will be able to achieve less or more than its planned profit. A variance is unfavorable if the actual cost exceeds the standard cost (Irwin, 2003) but favorable if the actual cost is much lower than the standard cost.             Standard costing has many advantages which includes providing basis for cost comparisons and enabling managers to employ management by exception. Management exception is the process where managers focus their attention on those areas where the most significant variances occur (Prentice-Hall, 2000). Because of the cost standards set, there would be a means of performance evaluation and motivation for employees to achieve standards. It may also result in cost savings in maintaining inventory records (Anonymous, 2006). Cost standards primarily help management in budgeting.             However traditional costing system such as standard costing poses many disadvantages especially today that most industries are driven by technology, globalization and changing consumer behavior. One of the disadvantages of standard costing is that shorter product life cycles lead to outdated standards (Anonymous, 2006). Consumers periodically change their demands and preferences brought about by introduction of new technology thus most products have shorter life cycles. Products like personal computers, mobile phones, gadgets, appliances, electronic equipments and other products that have sprung from technologies become obsolete within a few months of their introduction. Setting standards for these products would be difficult for the manufacturers. Price standards are set based on historical costs but as technology evolves, materials or parts used in making products tend to become lower as new materials are also introduced. For example, the microprocessor used in making PCs become lower as new types of microprocessor are introduced with higher memory capacity. It is hard to set cost standard with this material there are new materials that are introduced, the tendency of a manufacturer would be to also adopt with the changes or else its product would be outdated. Historical cost can not be used when new materials would be used in manufacturing products.             Another disadvantage of standard costing is that its primary focus has traditionally direct labor, which represents a shrinking portion of the total costs (Anonymous, 2006). As also brought about by technology, automation and mass production has been the trend in most manufacturing companies today to be able to deliver products faster to consumers. Variances tend to be small or nonexistent in automated production process (Anonymous, 2006) therefore, when a standard costing is used by companies with automated production process, the information on the cost would not be that reliable.             In standard costing, the practice is “how much does the product cost” where the new product costs will be estimated based on the purchased materials and parts, labor costs, and other manufacturing overhead costs under the current production standards (Lee, 1994). Also, as stated above, standards are based on the specification and design of the product so once the cost is realized to be too high, product must be redesigned or smaller profit margin must be accepted. Once the product is developed and design there is a limit to how much cost cutting companies can do in the manufacturing stage (Lee, 1994).             With the integration of economies and societies in the world which is usually called globalization, companies today are competing in the global market where competition is very tough. While standard costing uses variance analyses that tend to focus primarily on cost minimization (Anonymous, 2006), competition in the global market does not primarily focus on cost but on improving its products that will add value to the products. Also, consumers today are not only cost-oriented but also look for the features and qualities of products especially now that consumers are exposed on the innovations and development that technology can provide.             In US companies where standard costing is the most prevalent costing system, costs of designing, producing, marketing, and delivering products dictate the mode of competition (Lee, 1994). This mode of competition tends to focus on product profitability and not on relative position in the market and product leadership which are both very essential in global competition. Conclusion Drury (2004) stated that standard costing is most suited to an organization whose activities consist of a series of common repetitive operation which means that standardization is most applicable to companies whose activities does not vary rapidly and whose materials are not much affected by the external changes like changes in technology and whose products’ costs can be easily determined by its specification. Examples of these products are usually those with longer life cycles such as food, and clothing. Manufacturing companies who also have the potential to be successful by using standard costing are those who have definite market segment. Having a definite market segment will help in setting standards. For example, standard costing can be used by beer manufacturers where its market segment composes mostly of adults. However there are other factors that affect the costing of a product which are brought about by the changes in the internal and external environment of a company. At present, cost is also dictated or characterized by globalization, technology, production process and life cycle, and consumer buying behavior Based on this study, industries in a world characterized by globalization and shorter product life cycles can effectively used standard costing which is a cost system that primarily focuses on costs and profitability. Also, as wealth of consumers increase, cost will not be much an important factor in attracting wealthy consumers. Quality and value of products will be their focus. Therefore, standard costing can only be used in some companies especially on companies which do not rely heavily on technology. But on companies like Sony, Dell Computers, Microsoft, and other companies that are heavily reliant on technology and who have achieved market share due to globalization, standard costing will not be effective. As this study takes place, most sources and articles suggest that target costing which began with world-class Japanese manufacturers and response to shorter product life cycles as well as to increased global competition (Blunt et al, 2006; Lee, 1994), is the more effective costing system today. References: Anonymous , Chapter 10 Standard Costs and the Balanced Scorecard (PowerPoint) online date retrieved: April 18, 2006 < http://www.cba.uh.edu/dcollins/gchap10-sp03.ppt#256,1,> Blunt et al. Target Costing (PowerPoint), online             Date retrieved: April 18, 2006 <http://www.public.asu.edu/~daj0812/ACC503/class09/kaizen1.ppt#256,1,Target Costing> Drury, Colin and Tayles, Mike (2003) Profiting from Profitability Analysis in UK Companies, Working Paper Series No.3/18, Bradford University School of Management Irwin (2003) Chapter 10 Standard Costs, The McGraw-Hill Companies Inc Lee, John Yee (1994), Use target costing to improve your bottom-line. (CPA in  Industry) The CPA Journal Online < http://www.nysscpa.org/cpajournal/old/14979931.htm> Lewis, Ronald (1993) Activity-Based Costing for Marketing and Manufacturing             Quorum Books, Westport, CT Prentice-Hall (2000), Introduction to Management Accounting- A User  Perspective, Prentice-Hall, Inc. Credit:ivythesis.typepad.com

Costing of Products

Cost is a very important aspect of a business and it is where the profit of a company is based. It is basically a measurement,...

Job Costing and Process

Job Costing and Process

Job Costing and Process Costing Systems Job-order costing is used in situations where the organization offers many different products or ...

Job Costing Process

Job Costing and Process Costing Systems Job-order costing is used in situations where the organization offers many different products or services, such as in craft manufacturing, hospitals, and legal firms. These system is used by companies whose products, or its wide range of products, are treated as individual jobs (Williams, 1985). These companies receive requests from customers that include detailed specifications regarding the product. The specifications are used as a basis for estimating the total cost of completing the job and submitting a bid or the cost to the customer. Process costing is used where units of product are homogeneous, such as in flour milling or cement production on a continuous basis. Manufacturing costs, unlike job-order system, are accumulated in processing departments rather than individually (2002). However, the two systems also share the same characteristics. The basic purpose of the two system is to assign material, labor and overhead cost to its product, and the flow of cost through the manufacturing accounts is basically the same (Manufacturing Overhead, Raw Materials, Work in Process and Finished Goods). To explain further process costing, let’s take a look at Laura Foods which produces garlic flavored tomato sauce. The production of the sauce requires two major processes, chopping, and mixing and canning. Now assuming that Laura foods incurred ,000 in the mixing and canning process to mix 100,000 pints of tomato sauce, how would they be able to compute the mixing cost per pint? Laura could simply divide her incurred cost from mixing and canning to the number of pints of tomato sauce it produced (,000 / 100,000 = 0.20/pint). One good example of job costing is the David, Bryan and Co. furniture manufacturing business. They received an order for 10 chairs all the way from Kansas City. The total cost of the job was 0, dividing the total cost of the job to the number of chair manufactured, we would know that the price for each chair is given at (0/10 = ). The differences between the two systems are more obvious than its similarity. Process system manufactures a single homogenous product that is produced on a continuous basis over a long period of time, while job-order costing may manufacture many different products in single period. This is because production in job-order costing is done individually and not departmentally. And that is why process costing key document is the department production report of costs accumulation while job-order costing key document is the individuals job-cost sheet. Credit:ivythesis.typepad.com

Job Costing Process

Job Costing and Process Costing Systems Job-order costing is used in situations where the organization offers many different products or ...

BUSINESS PAPER: USE OF STANDARD COSTING AND PRODUCTION

The objective of this study is to critically analyze the use of standard costing and production as a method of control in a world characterized by globalization. The study will also discuss the shorter product life cycles and increases in consumer wealth ( 1991).  The traditional cost concepts can be easily defined by the terminologies utilized in the American industry by laborer and managers in the field of production, engineering, marketing and accounting activities. The transformation of these concepts is the results brought by the global competitive market. Technology brought by computers also has a great impact and have it necessary to new cost concepts and terms as well.   To have an in depth understanding of standard costing production, the three major aspects of businesses must be thoroughly discussed: manufacturing, merchandising and service industries (, 1990). The manufacturing firm merges and consumes economic resources to produce a finished product. Merchandising companies, such as wholesalers and retailers, offer the middleman job of getting the manufactured product to the consumer. Service industries give services as an alternative of manufacturing a product. Even though there are major disparities in the roles performed by manufacturers and by merchandising or service firms, the terms and concepts of managerial accounting apply equally well to all industries ( 1990). Only the methods and format of presentation may differ. Examples of the industrial groups include:   ·         Manufacturers a.      Mining b.      Industrial goods c.      Consumer goods d.      Construction   ·         Marketing a.      Wholesalers b.      Retailers c.      Brokers d.      Warehousing and transportation.     ·         Service Industries   a.      Recreation and personal care industries b.      Health care: hospitals, nursing homes, clinics c.      Information systems: computers, word processing d.      Government agencies: federal, state, local   There are significant implications to modify the priorities on managerial accounting. The production-line manufacturing industries are supreme for a highly prepared standardized cost accounting systems move toward. The service and marketing industries are not ( 1990). They need an importance on decision-making techniques that are elastic and timely. Marketing comprises demand-creating and demand-servicing activities. The demand-creating activities are called promotional and include advertising and selling functions. The demand-servicing activities are called logistics or physical distribution and include all physical movement functions from the production line to the ultimate consumer. Contemporary cost systems have not yet content the informational necessities of the marketing career. Marketing managers are repeatedly asking for accounting expenditure classifications that will augment their decision-making capability (, 1994). There will continue to be a growing insists for managerial accounting methods in the field of marketing. In the managerial accounting of Toyota, the company does not put emphasis on the capacity, timing, and recording of costs, however on the understanding and analysis of cost data for decision making. The effect is that a wide variety of descriptive adjectives have developed in managerial accounting to allow for more precision in the interpretation of the data. Each adjective used with cost gives it a more precise meaning ( 1990). The company’s cost has been defined as a sacrifice of resources incurred for a future benefit or objective. The resources that are sacrificed are in the form of cash or cash equivalent, such as payment in kind, or the incurrence of a liability. Toyota is expecting the future benefit that refers to assets such as inventory, machinery, equipment, property, and intangibles ( 1990) . The expenditure for a future benefit (asset) that lasts only during the current period is a cost that is expensed. For example, the cost of office supplies used in the current fiscal period is classified as an expense because it does not have benefits that carry over to future fiscal periods. Toyota is also implementing a cost objective, that is a product for which the total or unit cost is to be determined. A cost objective may be the product manufactured or the service performed, or it may be a department, a process, or a function, all of which are referred to as cost centers (  1991). The cost center is the smallest unit for which costs are accumulated for reporting and analytical purposes. Since Toyota is a traditional Japanese company, they are still implementing the traditional cost accounting systems utilized in the United Kingdom and are being challenged by corporate financial and production executives and by professors of both accounting and production management ( 1987). A major controversy over the relevance of the traditional cost accounting systems has emerged. There are two opposing viewpoints, one that points directly to the traditional cost accounting system as a major contributor to the diminution of productivity in selected U.K. industries, and the other viewpoint that the cost accounting system is not a direct cause of production problems. Those who support the first position propose a major overhaul of traditional accounting systems in order to solve production problems resulting from world-class competition ( 1987). Those who take the opposing viewpoint are convinced that the production systems need the overhaul and that the traditional accounting systems cannot directly cause production problems. They point out that management accounting cost systems is already flexible and custom designed so that only minor tune-ups are necessary to accommodate the changes brought about by world-class competition.  The key characteristic of the direct cost Toyota is traceability to the cost object, such as the product (, 2005). In the traditional financial accounting system, only direct materials and direct labor are assumed to be traceable to the product. A computer-integrated manufacturing system (CIMS) incorporates production changes that make it possible to trace some overhead directly to the product. There is one significant change in cost accounting that may be necessary because of the pressure to change the production process; the change is in the definition of overhead (, 2005). At present, all factory overheads are assumed to be indirect, not traceable to the product. In the case of Toyota if some of the overhead costs under CIMS production processes can be directly traced to each product line, then overhead should no longer be assumed to be inherently indirect, and should be divided into direct overhead and indirect overhead (, 2005). Direct overhead is that which can be traced to the product just as direct material and direct labor. Indirect overhead will have to be allocated to product lines as before. This concept is not new, but it has not been emphasized or foreseen as a panacea for the problems created by the pressures to change the production process The following list describes the most important objectives of computer-integrated manufacturing systems of Toyota ( 2005):   ·         Increase product quality. ·         Shorten the time required for non-value added activities, for example, machine set up time. ·         Reduce inventory levels and push-through versus pull-through methods. ·         Develop flexible manufacturing systems where feasible. ·         Work toward a fully integrated and coordinated production system operated by a centralized computer.   Although Japanese automobiles and electronic equipment are noted for their high quality, it was not long ago that “made in Japan” was a synonym for cheap and breakable. After World War II, the Japanese borrowed many industrial techniques from the United Kingdom, and while the U.K. manufacturers were enjoying a seller’s market and built obsolescence into their products, the Japanese and European countries began to improve quality (,1990). Some U.K. manufacturers have fallen behind their foreign competitors and must improve quality. Major efforts to improve quality have been made in the automobile industry and other highly competitive industries. A major objective of the new manufacturing environment is to improve quality. The computer-integrated manufacturing system (CIMS) and its related technological changes provide the means for improved product quality. Toyota tries to preserve its homegrown economic model such as the values it practices in its business practices to be able to retain their competitive advantage ( 1990). Indeed, it is a hard task for the company to preserve its locally conceptualized model while maintaining linkages with the global economy. However, because critical success factors are established as key aspects needed by a company, this has become easier in dealing with the issue of globalization.      Although the core values which have distinguished the management of Toyota is still retained, the company has stepped out to shine for the rest of the world ( 2005). The latest developments in the company proved that it is stronger than ever, emerging victorious from otherwise discouraging situations such as the adverse effect of the strong yen. The company had a strong financial performance with increased net earnings of .2 billion and increase global sales by 9.9 percent. This has narrowed the gap with General Motors and tied with Ford which gives credence to predictions that the company will take over as the world’s largest automaker by 2015 During the past two decades, major advances have been made in production technology. Particularly in the 1980s, the microcomputer and its software, the Japanese economic and cultural explosion, and the expansion of worldwide competition have contributed to hastening technological change in U.K. heavy manufacturing industries. The motivation for technological change is survival. United Kingdom companies no longer dominate the world markets. Toyota is no longer the largest corporation in the world. Several Japanese companies have replaced it (, 2005). The three situations that follow illustrate the effects of changing production technology on the cost analysis and control system. The first situation represents the traditional production and cost system, which is labor intensive. The second situation represents the introduction of automation, but no change in the cost analyses and control system. The third situation represents the most advanced technological changes in production accompanied by changes in the cost analysis and control system. The purpose of the illustration is to reveal the positive and negative effects of production changes on the costing system and to demonstrate the specific changes in the costing system that are necessary to support effective management decision. It has become popular to blame the costing system for the lack of relevant cost information ( 2005). Cost analysis and control systems are instituted by top management in contrast to financial accounting reporting systems, which must adhere to GAAP rules and regulations. If management wants more specific cost data they must be willing to pay for it. The illustrations reveal the necessity for more detailed and accurate cost tracking under more automated production systems. In all three situations the company has multiple product lines.               References Credit:ivythesis.typepad.com

BUSINESS PAPER: USE OF STANDARD COSTING AND PRODUCTION

The objective of this study is to critically analyze the use of standard costing and production as a method of control in a world characte...

Budget Targets as Performance Measures

Budget Targets as Performance Measures               This paper discusses how effective are budget targets when used as performance measures. It gives the reader a clear explanation of the probable issues raised by the effectiveness of the used of budget targets as performance measures. It also includes considerable evidence of research into the said topic. A conclusion, which can be found at the last part of the paper, is drawn on the key findings to come up with the final judgment regarding the said topic. Introduction             A budget is an intelligently prepared estimate of future business conditions. In a business concern, such an estimate must include the income, probable costs, and expenses. Budgets are designed to assist management in the coordination of the selling, production, and administrative functions of the business. Budgetary control system is the term applied to a carefully worked-out plan covering the coordination of all these functions, as well as the continuous study and comparison of the actual operating figures with the budgeted figures to interpret the reasons for discrepancies.             Since business conditions vary, so is the budgets prepared for them. The basic principle of forecasting for control is the same for all businesses. In a small organization, the task of the preparation of a budget is in the hands of the accountant. In larger organizations, the budget preparation will be further supervised by a budget director. It must be emphasized that the budget is an instrument of control. It can be used by management in the determination of the amount of the deviations form plans and its possible causes. If there is a negative controllable cause, management should act to remove it. That is the meaning of control via budgets. The most important thing here is the comparison of the actual with the planned results, since this comparison reflects the operating conditions of the business.   Target Costing             Target costing is defined as a technique for profit management. It aims on ensuring that future products bring-in sufficient profits that enables the firm in achieving its long-term profits plans. This objective can only be made possible if these two conditions are met: (1) products are designed to satisfy the demands of the firm’s customers; and (2) it is manufactured at a sufficiently low cost. The cost at which the product must be manufactured is first identified in the target costing systems. This is to know if it enables the achievement of the profit objective. Then a disciplined environment is created afterwards to help ensure the achievement of the target cost.              Most target costing processes contain three distinct steps. These are market-driven costing, product-level target costing, and component-level target costing.             It is normal for a firm to face competitive pressures in the market place. However, there exists the need of transmission of these pressures to its product designers and suppliers. Therefore, market-driven costing is used for this purpose. This is done by subtracting the target profit margin from the target-selling price to determine the product’s allowable cost.             The market is the one who sets the allowable cost. Therefore, it does not incorporate the capabilities of the firm nor its suppliers. Setting the target cost equivalent to the allowable cost risks setting unachievable targets. Consequently, the effectiveness of the target costing is being reduced. For that reason, in the step of product-level target costing, product-level target costs are more often set higher than the allowable costs. These product-level target costs are determined in order for them to be achieved, only if the product designers expend considerable effort on designing costs out of the future products. The objective here is to create intense but realistic pressure on the product designers in reducing costs.             On the other hand, equivalent pressure should also be created on the firm’s suppliers. Therefore, component-level target costing is needed. This type of costing is used to focus supplier creativity on the reduction of the costs of their supplies’ components. At the heart of this step lies the establishment of the price that the firm is wiling to pay for each of the externally acquired components of their new product. In this way, the buyer is able to establish the selling prices of its suppliers. However, these prices must be realistic. In addition, it must also allow the suppliers to make adequate returns in case they also expend considerable efforts on designing costs out of their products. These three major steps are more often contained in most target costing systems. The only thing that makes them different by firm is the way these steps are being undertaken.        Key Principles of Target Costing             Target costing is based on six key principles. First is the price-led costing. In here, market prices are used to determine allowable or target costs. Target costs are calculated using a formula similar to this: market price — required profit margin = target cost.            The second principle is based on the focus on customers. Customer requirements for quality, cost, and time are simultaneously incorporated in decisions on product and process. It also serves as a guide to the cost analysis. The value (to the customer) of any features and functionality built into the product must exceed the cost of providing those features and functionality.             Third is the focus on design. Cost control is emphasized at the stage of product and process design. Therefore, engineering changes must occur prior to the start of the production. This will result to lower costs and reduced “time-to-market” for new products.             Fourth is the cross-functional involvement. In here, the one responsible for the entire product, from initial concept through final production, is the cross-functional product and process teams.               Fifth principle is the involvement of the members of the value-chain. All members of the value chain, such as the suppliers, distributors, service providers, as well as the customers, are included in the target costing process.             The last principle is on the orientation of a life cycle. Total life-cycle costs are minimized for both the producer and the customer. This includes the purchase price, operating costs, as well as the maintenance and distribution costs. Target Costing as a Valuable Tool             Target costing is a valuable tool and philosophy in supporting the overall efforts of an organization in remaining its competitiveness with regards to cost, while being able to meet the customer’s demands, all at the same time. Yet it is not a stand-alone effort. It involves the process that, if carried out by cross-functional teams, together with other value-adding processes, will be in its most effective manner of execution. This might include early supplier involvement, value analysis, and value engineering.             Target costing is also a tool worth investigating for any for-profit organization facing high profit and competitive pressure. The reasons for firms on why they decide to use target costing can be broadly defined. These are due to the need of increasing competitiveness, the desire to increase suppliers’ cooperation, and the goal involving the suppliers in their new product or service development process to leverage some of their supplier’s expertise. Additionally, there are also cost management reasons for performing target costing. This includes the improvement of their understanding of their own, as well as the supplier’s cost structures, improving internal cost management as well as cost monitoring, and increasing cost accountability.             Target costing is also best performed in cross-disciplinary teams, with suppliers as their team members. The integration of target costing success into the performance objectives of each team member is essential to the effectiveness of this cross-functional team.             Accountability for results is another critical issue to the long-term success of target costing. One way to create accountability is through holding of regular meetings that discusses the progress throughout the development cycle of the new product or service. Top management is involved in the said meetings. They undergo a clearer analysis of the comparisons made between the current estimate costs and the target costs. All gaps must be explained, with a corresponding plan in closing the said gaps. A tiered-team approach is said to be an effective technique in the management and implementation of target costing. In this approach, a higher-level team oversees the entire project. They are supported by other teams who actually execute and implement the target costing process within the organization and the supply base. A representative from the supply management participates on both of these teams.               In order to achieve target cost goals, organizations have undertaken various activities, ranging from minimal to extensive efforts. Among the less extensive efforts are the use of factual data in negotiating with suppliers and the sharing of long-term strategies to gain cooperation from suppliers. On the other hand, the more extensive methods have broader implications. These include the feature trade-off, the change of specifications, materials, and of design. In general, these efforts require team coordination. Close working relationships among the supply management, design/R&D, manufacturing, and marketing, if possible, are important in case there is a change in any feature performance or appearance. If the desired target cost was not achieved, the project may be cancelled or delayed.             Target costing is not only useful for components and unique raw materials. It may be also used for standard raw materials, packaging materials, services, outsourcing, tooling and capital. The potential impact of the purchased item must be high enough to offset the cost and effort related to target costing. Still target costing has the potential for widespread use.             Target costing is useful beyond new product or service development. There are evidences in case studies where organizations also use target costing for the improvement of their existing products or services. Some of them even specified their use of target costing for non-production items or for internally used items, instead for the reselling of a certain product or service. Target costing is used in monitoring actual supplier and total cost performance against targets, for encouraging the continued competitiveness of suppliers, as well as the organization’s products or services, as the market matures. In other words, target costing is also used with existing products and services in order to provide a scale for cost performance of both suppliers and the internal supply management function.             Target costing can also be used effectively for the purchase of high dollar services, especially if the services can be tied back to a product or service that will be resold. Take this as an example; one organization indicated that it utilizes target costing for the purpose of purchasing services that support new product development. These items are a relevant part of the new product costs and needs to be budgeted and attributed to that product. Just remember these conditions: (1) it should be high-dollar expenses; and (2) it should be allocated back to the product.   Conclusion             Those who use target costing are pleased with its results. They even intend to use it continually (and even increase its use). Among the benefits of target costing are improved supplier relationships as well as their involvement, the presence of teamwork, smooth the progress of new product and new service development process, supports cost management, and advancement of other internal improvements within an organization.             An integrated, institutionalized target costing effort is described as a resource-intensive process. It demands team effort, with the involvement of the supply management, marketing, accounting, research or design, and manufacturing. It also requires the building of supplier relationships in order to obtain the benefits of early supplier involvement and design participation. One critical success factor is the top management support. This enables the accessibility of time and creates an internal reward structure that supports target costing across all disciplines within the organization. Target costing becomes an essential part of the new product and service development process, as well as an ongoing approach for the monitoring and improvement of the costs of existing products and services.             There are numerous ways of the application of target costing within an organization. At one side, it is a supply chain-wide effort that includes value engineering, value analysis, and early supplier involvement. However, not all organizations have the resources and the company-wide support necessary to the success of an integrated, institutionalized target costing. As a result, at the other extreme, target costing can be used by a single department to benchmark performance, work with suppliers on improvements, and communicate cost targets to suppliers and within the organization. This can serve as a starting point for the growth of target costing efforts, as well as its benefits throughout the organization.                                Credit:ivythesis.typepad.com

Budget Targets as Performance Measures

Budget Targets as Performance Measures This paper discusses how effective are budget targets when used as performance mea...

Job Costing and Process Costing Systems

Job Costing and Process Costing Systems

Job Costing and Process Costing Systems Job-order costing is used in situations where the organization offers many different products o...

Job Costing and Process Costing Systems

Job Costing and Process Costing Systems

Job Costing and Process Costing Systems Job-order costing is used in situations where the organization offers many different products o...

Job Costing and Process Costing Systems

Job Costing and Process Costing Systems Job-order costing is used in situations where the organization offers many different products or services, such as in craft manufacturing, hospitals, and legal firms. These system is used by companies whose products, or its wide range of products, are treated as individual jobs (1985). These companies receive requests from customers that include detailed specifications regarding the product. The specifications are used as a basis for estimating the total cost of completing the job and submitting a bid or the cost to the customer. Process costing is used where units of product are homogeneous, such as in flour milling or cement production on a continuous basis. Manufacturing costs, unlike job-order system, are accumulated in processing departments rather than individually ( 2002). However, the two systems also share the same characteristics. The basic purpose of the two system is to assign material, labor and overhead cost to its product, and the flow of cost through the manufacturing accounts is basically the same (Manufacturing Overhead, Raw Materials, Work in Process and Finished Goods). To explain further process costing, let’s take a look at Laura Foods which produces garlic flavored tomato sauce. The production of the sauce requires two major processes, chopping, and mixing and canning. Now assuming that Laura foods incurred ,000 in the mixing and canning process to mix 100,000 pints of tomato sauce, how would they be able to compute the mixing cost per pint? Laura could simply divide her incurred cost from mixing and canning to the number of pints of tomato sauce it produced (,000 / 100,000 = 0.20/pint). One good example of job costing is the David, Bryan and Co. furniture manufacturing business. They received an order for 10 chairs all the way from Kansas City. The total cost of the job was 0, dividing the total cost of the job to the number of chair manufactured, we would know that the price for each chair is given at (0/10 = ). The differences between the two systems are more obvious than its similarity. Process system manufactures a single homogenous product that is produced on a continuous basis over a long period of time, while job-order costing may manufacture many different products in single period. This is because production in job-order costing is done individually and not departmentally. And that is why process costing key document is the department production report of costs accumulation while job-order costing key document is the individuals job-cost sheet.       Credit:ivythesis.typepad.com

Job Costing and Process Costing Systems

Job Costing and Process Costing Systems Job-order costing is used in situations where the organization offers many different products o...

Job Costing and Process Costing Systems

Job Costing and Process Costing Systems

Job Costing and Process Costing Systems Job-order costing is used in situations where the organization offers many different products o...

Job Costing and Process Costing Systems

Job Costing and Process Costing Systems Job-order costing is used in situations where the organization offers many different products or services, such as in craft manufacturing, hospitals, and legal firms. This system is used by companies whose products, or its wide range of products, are treated as individual jobs. These companies receive requests from customers that include detailed specifications regarding the product. The specifications are used as a basis for estimating the total cost of completing the job and submitting a bid or the cost to the customer. Process costing is used where units of product are homogeneous, such as in flour milling or cement production on a continuous basis. Manufacturing costs, unlike job-order system, are accumulated in processing departments rather than individually. However, the two systems also share the same characteristics. The basic purpose of the two system is to assign material, labor and overhead cost to its product, and the flow of cost through the manufacturing accounts is basically the same (Manufacturing Overhead, Raw Materials, Work in Process and Finished Goods). To explain further process costing, let’s take a look at Laura Foods which produces garlic flavored tomato sauce. The production of the sauce requires two major processes, chopping, and mixing and canning. Now assuming that Laura foods incurred ,000 in the mixing and canning process to mix 100,000 pints of tomato sauce, how would they be able to compute the mixing cost per pint? Laura could simply divide her incurred cost from mixing and canning to the number of pints of tomato sauce it produced (,000 / 100,000 = 0.20/pint). One good example of job costing is the David, Bryan and Co. furniture manufacturing business. They received an order for 10 chairs all the way from Kansas City. The total cost of the job was 0, dividing the total cost of the job to the number of chair manufactured, we would know that the price for each chair is given at (0/10 = ). The differences between the two systems are more obvious than its similarity. Process system manufactures a single homogenous product that is produced on a continuous basis over a long period of time, while job-order costing may manufacture many different products in single period. This is because production in job-order costing is done individually and not departmentally. And that is why process costing key document is the department production report of costs accumulation while job-order costing key document is the individuals job-cost sheet.   Credit:ivythesis.typepad.com

Job Costing and Process Costing Systems

Job Costing and Process Costing Systems Job-order costing is used in situations where the organization offers many different products o...