In every organization, there are various assets that help in normal running running of the company It is always very important for an organization to determine the value of various assets within its pool. Product costing therefore comes out as a very important process of determining this value. Eldenburg, Brooks, Oliver, Vesty and Wolcott (2010, p. 45) define product costing as the practice of assigning direct or indirect costs to products, customers, or other costs to various items.
Product costing is very important to the organization because it helps the management in various ways. As the above scholar note, the management heavily relies on the information that the accounting unit would provide them with in regard to the value of the assets in order to make various decisions in the organization.
Although the product valuation is not only important at the managerial level, this information is also important to the finance department in ensuring that it allocate the right amount of finance to every department, which would enable it to cater for the value of the assets it holds. Employees may not directly need this information. There is always a general need for everyone in the organization to ensure that he or she knows the worth of the assets they are handling so that he or she can respond appropriately in managing them (Kerzner 2003, p. 12).
This study seeks to identify the rationale behind Product Costing and the rate at which the management would require this information.
Major Purposes of Product Costing
Product costing as a strategic function has gained a lot of relevance in the near past to the managements of various organizations around the world. Langfield-Smith, Thorne and Hilton, (2009, p. 18) observe that the world has gotten increasingly competitive.
Firms are coming up with strategies as regards to managing this competition, which forces every organization to determine a way of remaining afloat in this competition.
The above scholars note that although there is a need for a firm to define unique methods of managing the competitive business world, there are some business factors that are currently considered universal. Product costing is one such factor.
The need for product costing has become universally important to various firms across the divide. Some of the reasons for product costing are as stated below.
Product Costing for Decision Making Process
One of the main reasons why product costing is important is to help in the decision making process. The management requires the outcome of the product costing to help it determine how to approach some of the managerial decisions. The aims and objectives of the firm would always be made based on the current value of the assets.
Ogilvie (2008, p. 67) states that it is not possible to plan for the future without the knowledge of the current value of the assets. The management would therefore need product costing to help in planning for the future, given the current asset base.
According to Schwalbe (2005, p. 41) product costing information would be needed at various departments of the organization. In the manufacturing department, this information is very important. This department would require this information to help it determine both the variable and fixed cost of production, and the cost of output.
This department would then need to compare these costs very closely in order to determine the productivity and the profitability of the department. The information would also be very important in determining the overhead costs so that it may determine how to control them.
To the marketing department, product costing is very important in determining product proposition in the marketplace. Product proposition is always needed by the marketers to assign value to the product in the market. The process of identifying a niche for the product would also require the management to have clear information as regard to product cost.
In the Procurement Department, this information would be required to help determine the value of products that would be needed for the normal operation of the organization.
Product Costing for External Reporting
Product Costing is also very important to the organization for the purpose of external reporting. The management is responsible to various external institutions that would require this information for various reasons. The first institution that would require this information is the government.
Government requires this information to ensure that the right taxation is imposed on the products of the organization. The organization would need to furnish the concerned government institution with the cost of the product so that they can add the tax to this value in order to come up with the right market price of the product that is inclusive of the value added tax.
Overstating the value of the product due to poor product costing process can be dangerous to the organization because it would mean that the tax that would be paid to the government would be more leading to reduced profitability. Underestimating this value may be considered by the relevant authorities as fraud hence it may possibly lead to litigation.
An organization would also be responsible to the shareholders. The shareholders have the right to know the value of every asset in the firm so as to know the general value of the firm.
The management and other relevant units therefore have the responsibility to ensure that they determine the cost of the products and of the firm and furnish this information to the relevant authorities.
Some nonprofit making organizations would be financed by well wishers or other organizations that share their vision. These individuals or organizations are very important stakeholders of such organizations hence must be treated with respect.
They have the right to know how their donations are spent. For this reason, the management must ensure that they determine the value of the product and pass this information to the donors.
The local government also has the right to be informed of the value of the products in the organization to ensure that it also imposes its tax as may be within the law. All these would require proper product costing process that would help ascertain the value of the product.
There may be a need to help determine the viability of a new product in an organization.
The management may need to ascertain the viability of the product and determine if it can be sold within the current market.
The organization would need to determine the cost of the product and determine if it may be profitable in the market given the current prevailing market conditions.
The information concerning product costing is very important to the organization and would be needed at various intervals for various reasons.
This would basically depend on various factors.
Product costing for decision making would be needed at different intervals depending on the nature of the decision to be made.
Strategic decisions are always made on varying durations. Those decisions that are made after a span of three years would require this information to be provided after every three years.
There are also strategic decisions that are made annually, normally at the beginning of a financial year. This would require that the top management is furnished with the information on a yearly basis. The operational decisions made quarterly would demand that the decision is made on a quarterly basis
Product costing information for the external purposes would be required at different intervals depending on the individual who needs the information. The national government would need the information on a monthly basis to determine the value of tax to be remitted by the firm on a monthly basis.
The organization must therefore conduct product costing on a monthly basis in order to avail the information to the government. In most of the cases, the levies by the local (state) governments are done on an annual basis. They would therefore need to be provided with this information on a yearly basis. For this reason therefore, the organization would conduct a yearly report and remit the same to the relevant offices in the local government. The shareholders may need this information on varying frequencies. In most organizations, the general meetings are always conducted annually.
In such forums, the shareholders must be furnished with the value of the assets (products) of the organization so that they may base their discussion on it.
Through this report, the organization would be in a position to determine if its investment is yielding the value expected and at the expected rate. The management will be able to determine the future of the organization based on the provided values.
In some instances, some shareholders may demand to know the value of the products at a period of less than a year, maybe on a quarterly basis.
In such cases, the management must ensure that they provide this information at the desired interval in order to ensure that they maintain the confidence of the shareholders.
The information about product costing may also be needed in cases of determining the viability of a new product. The business environment has gotten increasingly competitive. Business units have the responsibility of ensuring that they remain relevant in the market by ensuring that they produce products at reasonably close intervals.
This involves creativity and innovativeness. The firm would therefore have to determine the viability of these new products by conducting product costing.
Comparing the cost of production and the possible selling price would help come up with the decision as to whether the product would be financially viable.
The interval with which this information would be required depends on the innovativeness of the firm and the nature of the products it is dealing with. A firm that produces new products quite often to the marker would need to conduct product costing at the same rate. It would have to conduct this process whenever they come up with a new product.
Implications of Frequency of the Requirement of Product Costing Information on Development of a Product Costing System
Product costing system is set of procedure or the methodology of determining the cost of the product in an accurate and timely manner.
It is always important that a given organization defines appropriate product costing system that would enable it come up with accurate value of any given product. Product costing system is always important in determining accurately, the full costs of delivering products in the market, and the profitability of the same.
The frequency with which the costing process needs to be done would have direct consequence on product costing system. it is very important that at every stage of product costing, an accurate value is determined. Some product costing systems require a longer period for the process to be done successfully. In this case, if the information is needed after a short interval, the management must ensure that the system taken would accommodate the set period. On the other hand, there are some instances where the information would be required after a period of one year. In such cases, the system that requires longer periods may be considered
According to Weygandt, Kimmel and Kieso (2009, p. 16) complication may arise in cases where the management has developed a system that suits it but circumstances arises where the management has to use the system when it is not required.
Such cases may arise where the organization has set a system that would allow them conduct a product costing process on an annual basis but circumstances forces it to conduct it on a shorter period. The accuracy of the process may be questionable.
List of References
Eldenburg, L, Brooks, A, Oliver, J, Vesty, G & Wolcott, S 2010, Management accounting, Wiley and Sons, New Jersey.
Kerzner, H 2003, Project Management: A Systems Approach to Planning, Scheduling, and Controlling, Wiley, New York.
Langfield-Smith, K, Thorne, H & Hilton, R 2009, Management accounting: information for creating and managing value, Cengage, New York.
Ogilvie, J 2008, CIMA Official Learning System Management Accounting Financial Strategy, Butterworth-Heinemann, New York.
Schwalbe, K 2005, Introduction to Project Management, Course Technology, New York.
Weygandt, J, Kimmel, P & Kieso, D 2009, Managerial accounting: tools for business decision making, McMillan, London.