Costing of the production system
Costing of the production system enables the management to be able to identify all the direct and indirect costs associated with a project which in most cases will be used in performance measurement and profit evaluation. Cost -based pricing approach, for instance, is based on using the cost of production as the basis for assigning a price of a commodity. Through this approach, all the cost either indirect or direct associated with the manufacturing of the product are assigned to the final output. The approach enables identification of some costs and operational overheads which times seems difficult to quantify. Through this approach labor overheads, for example, will not be based on the hours worked but by the amount of production realized through the said labor. The approach allows room for improvement for skilled labor. When the cost approach is utilized to not only assign costs of production but also as the basis for remuneration employees will tend to produce more to reduce their cost of production overheads. The employees will r]]tend top produce more to lower the cost of production per given unit of output. Through this approach past production records are used to enable the organization budget for future spendings towards similar projects.
Through actual identification of cost drivers in a given project the management can be in a place to control, these costs and at also eliminate some unnecessary cost drivers in the production sector. Unskilled labor reduces production efficiency increasing the amount an employee takes to finalize a given task. Identifying this cost driver through the use of other means where all cost drivers are added together, and the amount divided with the actual production may not necessarily provide information about employees incompetence. The other approach instead tends to generalize such issues of efficiency but instead associate the cost with the fixed cost and overheads of the project and therefore not necessarily tackling the actual cost driver.
Through this approach, the organization can evaluate and quantify the cost associated with such issues as employees incompetent to the overall production process. The approach also provides a basis for measurement for cost analysis per a given unit of production. Through this approach cost associated with raw material purchasing and storage, for instance, is allocated during the process of purchasing and storage but not after the overall production has been made. The cost associated with work in progress is also allocated within the time when this activity is occurring. The cost related to finished goods also gets allocated when the outputs have been acquired. Through the approach, therefore, the analyst will be able to know the area which is more expensive to operate than others. The management, therefore, can use the Pareto approach to control the cost of production. The areas with minimal cost of production are identified, and cost control mechanisms are directed to specific points rather than trying to control the overall cost which may be complicated to understand.
The approach is best suited for the manufacturing industry; this is because the process involves many activities before the final output can be realized. The approach enables the management to identify different cost drivers within the sub production units and thus enhancing ease in control of the production cost.
Maskell, B. H., Baggaley, B., & Grasso, L. (2016). Practical lean accounting: a proven system for measuring and managing the lean enterprise. Productivity Press.
Laviana, A. A., Ilg, A. M., Veruttipong, D., Tan, H. J., Burke, M. A., Niedzwiecki, D. R., … & Kamrava, M. (2016). Utilizing time‐driven activity‐based costing to understand the short‐and long‐term costs of treating localized, low‐risk prostate cancer. Cancer, 122(3), 447-455.