Choosing A Costing System

Product costs Vs period costs

As commented by Chang et al., (2015), cost could be termed as sacrifice of resources in order to gain any specific benefit or other resource. The costs are categorised as follows:

The product costs are those costs apportioned to the production of products and they are realised for financial reporting at the time of sale. Thus, with the help of these costs, Carl would be able to include direct labour, direct materials, factory wages and depreciation. Period costs are those costs through which Fancy Chocolate could be able to track administration and marketing costs to devise budgets accordingly.

Prime costs could be considered as the total of direct costs like direct materials, direct labour and other direct costs (Christ & Burritt, 2015). On the other hand, with the help of conversion costs, FC could be able to obtain an idea of the amount paid to convert raw materials to finished goods.

Fixed costs could be considered as those costs remaining fixed within particular output or sales level. On the other hand, the variable costs are those costs that vary with change in the overall activity level like direct labour and direct materials.

Sunk costs are those costs through which FC could incur or commit the same irreversibly and they could be stated as unrecoverable costs (Cugini & Pilonato, 2013). On the other hand, opportunity costs are those costs arising out of a foregone potential benefit like the cost of going on a picnic is the amount earned during that time.

The various costing approaches that are available to FC along with their pros and cons are discussed as follows:

Costing approaches	Advantages	Disadvantages
Job order costing	1. Accurate recording of costs and facilitation of cost control by contrasting actual with estimates 2. Enabling the management in ascertaining the profitable jobs and the jobs suffering losses (Drury, 2013)	1. High chance of committing mistakes, as the cost of a job might be wrongly posted to another job 2. Difficulty in cost comparison among various jobs, particularly during drastic modifications
Process costing	1. Both the clerical work and cost are lower in contrast to job costing and finding of cost is simpler. 2. The cost apportionment could be carried out easily and the costs associated with each process are ascertained accurately (Marota et al., 2017).	1. Since it is based on historical cost, the cost information might not be beneficial for future managerial decision-making 2. Since the work-in-process is expressed in equivalent units of production, subjective element could be initiated in the ascertainment of scientific cost.
Hybrid costing	1. It includes features of job costing as well as process costing system. 2. Useful at the time the production facility manages product groups in batches and the material costs are charged to such batches.	1. Difficult to account particular parts of the production process 2. Increased cost due to two different systems pertaining to tracking of cost (Rieckhof, Bergmann & Guenther, 2015).
Activity-based costing	1. This system identifies costs to the areas like processes, managerial responsibility, departments and customers along with the product costs. 2. Useful in setting the selling prices of products due to the availability of accurate data pertaining to product cost.	1. The various cost pools and multiple drivers of cost could be complex and it could prove costly to the organisation (Salako & Yusuf, 2016) 2. Difficulties might arise in implementing the ABC system like the selection of drivers of cost, apportionment related to common costs and changing rates of cost driver.

For both direct and indirect costs, FC could use the activity-based costing system. Even though it has been stated above that activity-based costing system is not suitable for small-sized organisations, since it is expensive to implement. However, it could be stated that in case of small manufacturers, the realisation of direct labour-based plant-wide rate of manufacturing does not depict the individual cost product in an accurate fashion (Sygulla, Götze & Bierer, 2014). In addition, the overall cost-based G&A percentage does not depict the overall administrative effort needed to support any part, customer or both. As a result, the management of FC could assemble a multidisciplinary team for applying the basic ABC concept in developing cost model, which would cost out each part of the organisation accurately.

Special ingredients and stir-ins could be considered as manufacturing costs, which are the significant determinants in the profitability position of an organisation (Tan et al., 2014). These products would be processed into the finished product inventory and their necessity is immense in production. The label design cost could be adjudged as the non-manufacturing costs and this expense play a significant role in the profitability of an organisation and its capability of competing in the market. FC need to keep this cost at a pertinent amount, which would be relative to the profit margin of the organisation and other operational expenditures.

In this case, the activity-based costing system has been chosen to compute the product cost of FC. This is because with the help of this costing system, costs could be traced to the areas like processes, managerial responsibility, departments and customers along with the product costs (Trappey et al., 2013). Along with this, the activity-based costing system is useful in setting the selling prices of products due to the availability of accurate data pertaining to product cost. Furthermore, FC could keep accurate recording of costs and facilitation of cost control by contrasting actual with estimates. Thus, with the help of this costing system, Carl would be able to include direct labour, direct materials, factory wages and depreciation. Period costs are those costs through which Fancy Chocolate could be able to track administration and marketing costs to devise budgets accordingly. Finally, FC could be able to obtain an idea of the amount paid to convert raw materials to finished goods.

References:

Chang, S. H., Chiu, A., Chu, C. L., Wang, T. S., & Hsieh, T. I. (2015). Material Flow Cost Accounting System for Decision Making: The Case of Taiwan SME in the Metal Processing Industry. Asian Journal of Finance & Accounting, 7(1), 117-134.

Christ, K. L., & Burritt, R. L. (2015). Material flow cost accounting: a review and agenda for future research. Journal of Cleaner Production, 108, 1378-1389.

Cugini, A., & Pilonato, S. (2013). The Cost Accounting System in B-to-B Service Companies: Cost Centers or Activity-Based Costing?. GSTF Business Review (GBR), 2(4), 122.

Drury, C. M. (2013). Management and cost accounting. Springer.

Marota, R., Ritchi, H., Khasanah, U., & Abadi, R. F. (2017). Material Flow Cost Accounting Approach for Sustainable Supply Chain Management System. International Journal of Supply Chain Management, 6(2), 33-37.

Rieckhof, R., Bergmann, A., & Guenther, E. (2015). Interrelating material flow cost accounting with management control systems to introduce resource efficiency into strategy. Journal of Cleaner Production, 108, 1262-1278.

Salako, M. A., & Yusuf, S. A. (2016). Cost Accounting: A Pivotal Factor of Entrepreneurial Success.

Sygulla, R., Götze, U., & Bierer, A. (2014). Material flow cost accounting: A tool for designing economically and ecologically sustainable production processes. In Technology and manufacturing process selection (pp. 105-130). Springer London.

Tan, S. S., Geissler, A., Serdén, L., Heurgren, M., Van Ineveld, B. M., Redekop, W. K., & Hakkaart-van Roijen, L. (2014). DRG systems in Europe: variations in cost accounting systems among 12 countries. The European Journal of Public Health, 24(6), 1023-1028.

Trappey, A. J., Yeh, M. F., Wu, S. C. Y., & Kuo, A. Y. (2013, June). ISO14051-based material flow cost accounting system framework for collaborative green manufacturing. In Computer Supported Cooperative Work in Design (CSCWD), 2013 IEEE 17th International Conference on (pp. 639-644). IEEE.