Strength & Weakness of of Product Costing Systems in Modern Organisations

1177 Words May 21st, 2011 5 Pages
The strengths and weaknesses of product costing systems in modern organisations
Product Costing System is a management tool that identifies the actual cost of producing each product. Identifying profit or loss on each product, companies can identify and promote profitable products while dropping, redesigning, or repricing unprofitable products.
It is the process of identifying and allocating all the relevant expenses that are accrued in the production and sale of a product, from procurement of raw materials to transportation of final product to retail establishments. As John A. Lessner indicated in the Journal of Accountancy, "In today's hotly competitive business environment, accurate product costing has become critically important to
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This process helps a company to determine selling price/unit by adding profit margin to profits. This method also enables a company to increase efficiency by pointing out the processes where cost is higher than budgeted.
The disadvantages of this system are that by accruing all costs and dividing such costs on an average, it becomes difficult to determine the actual cost accrued to manufacture a specific variant. This method may cause unreasonable pricing decisions at times as it does not takes customization into account for individual orders. This system reflects historical costs instead of current costs, thus limiting the purpose of managerial decision making in modern organisations.

Job Costing Method: This method is used where goods and services are produced upon receipt of a customer order, according to customer specifications, or in separate batches. In this process as each job is treated as a unique job, the material & labour can be easily traced and allocated to the job. The overheads are allocated on the basis of allocation rate. This method is used not only by manufacturing companies, but also by service industry like hospitals, law firms, etc. This system is a complex one that is prone to error, but it does yield good

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