 Costing
A costing system constitutes one of the most important elements of the managerial information system. Its presence enables the organization to meet three objectives. First, it enables the organization to effect managerial control. Without a costing system, organizations would not be able to make managers at all levels accountable for the costs of the resources they consume and identify whether they have been used efficiently and effectively. Second, cost information is an important element of the planning and decision-making process. Businesses develop, produce and market products and services. Identifying which products and services to bring to market would not be possible without a product costing system. Third, most organizations are legally bound to provide reports to external parties. The costing system serves to facilitate this legal requirement. Poorly constructed systems can lead to poor or bad decision making. If the determination of product costs is inadequate, firms may be sourcing inputs inefficiently and producing products that fail to bring them a competitive advantage. Furthermore, the system of responsibility accounting may be rewarding managers for making these poor decisions. Decentralization of costing, with the establishment of responsibility centres within the organization, can facilitate managerial planning and control. Responsibility centres are often classified into two types, production centres and service centres. Service centres provide services to other centres, and the costs accumulated in these centres are often reallocated to the responsible production or operating centres. Overhead costs can also be allocated in different ways: the principal ones are absorption costing, where fixed production overheads are considered a product cost, or contribution costing, where overheads are considered a period cost. The most important costing systems are job costing and process costing. Job costing is literally the costing of each job; this has its drawbacks in that it produces only an estimated product cost, as actual overheads are unknown at the time when the product cost is required. Process costing is used when homogeneous units of output are produced repeatedly through a sequence of processes, but it too produces only an estimate product cost, and neither system takes into account the accumulated costs of other activities such as marketing and distribution. More recently, simpler systems such as backflush costing and operational costing (a hybrid of job and process costing) have come into use. A.R. Appleyard |