The article under investigation is focused on the cost system. In particular, it discusses the way cost accounting influences product costs. The authors emphasize that product costs are vital for sensible decision-making in the framework of marketing and product introduction (Collier, 2015). Professionals may resort to different cost systems when there is a necessity to measure product costs, but no agreement is yet achieved regarding the most appropriate one. The authors maintained research trying to identify a system that provides the most benefit to the organization and stopped on the utilization of the long-term variable cost. In particular, attention should be paid to manufacturing and marketing.
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They stated that it is critical to remember that product costs tend to vary greatly. In some cases, this characteristic depends on the physical volume of items, labor and machine hours, or material costs, etc. In other cases, the difference and complexity in the product line matters. Thus, these costs are developed based on overhead support and marketing departments. All in all, it can be claimed that this variability is associated with the necessity to start the next phase of production, logistics, or distribution. On this basis, it is presupposed that professionals resort to long-term variable costs of manufacturing and marketing when they make vital decisions. These may include pricing, introducing, discontinuing, and reengineering or products or product lines. What is more, cost systems may turn into an influential component of the whole business that influences its success and ensures competitive advantages.
The full and variable cost can be used for the measurement of the product cost, but they fail to cost products correctly because they do not provide the inventory valuation function as expected. Financial reporting remains poor because of operational control and product costing deficiencies. They turn out to be too detailed and aggregate. Marginal costing, for example, does not work because it was developed for the conditions that are not typical today, such as small product diversity and variation in demand.
Discomfort is faced when using fixed-cost allocations because they focus on the direct labor hours, which is not actually when a lot of automated machinery is used. Multiple allocations may also be problematic because costs do not always have the same behavior. The cost of complexity should be considered by those organizations that operate in the framework of a complicated production-management environment. Transactions can be analyzed to understand what drives these costs. A direct-labor-based system and a transaction-based system can be approached to report product costs.
Still, in the framework of the conducted research where a firm tried using various systems, it was identified that the first one approaches the low-volume products as profitable while the strategic cost analysis leads to the opposite conclusion. This traditional system distorts product costs because it under-costs low-volume products and over-costs high-volume ones. Transaction-related allocation allows associating lower costs with common operations and a limited number of parts, making the value of commonality of parts accessible. It does not focus on the physical or dollar volume of materials, but this option is rarely important nowadays.
As managerial actions affect the level of expenditure, traditional variable costs fail to benefit companies as they do not focus on it. Long-term variable costs appear to be more advantageous in this perspective even though they make the use of the surplus capacity more complicated. In this way, cost drivers should be reflected as well as their association with the complexity of production for them not to be misclassified.
Collier, P. (2015). Accounting for managers: Interpreting accounting information for decision making (5th ed). West Sussex, UK: John Wiley & Sons.