Financial and Management Accounting indivi

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Finance & Accounting
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Material costs, labor costs, and overheads are some of the cost elements incurred in the manufacturing process. Cost accounting as…

Introduction

Product cost involves the determination of the cost incurred in the manufacturing of goods or provision of services. Manufacturing organizations, just as Worplestrop Partnership has to determine their products costs for two reasons. First is for decision-making and for the reason of external reporting. In manufacturing their products, Worplestrop Partnership would incur material costs, labor costs and other overhead costs that are associated with the manufacturing of the products (Hansen, Mowen & Guan, 2009).
In determining the product cots for decision purposes, an organization will only use relevant costs to arrive at the cost of a product. This form of costing method is referred to as direct costing method. In this case, only the variable costs will be included since they are the ones that can influence the management decisions. Management has control on the costs and can formulate and implement decisions that can reduce the cost elements and increase the returns of the company (Baginski & Hassell, 2003). On the other hand, Worplestrop Partnership has to determine the product costs for the purposes of external reporting. Here product costs are determined to help arrive at the best price to charge for the manufactured products. All the costs that are incurred by the company including the overhead costs and other fixed costs are apportioned in order to charge them on the consumers’ of the manufacturing company’s products. This form of costing is referred to as absorption costing or total costing in which all costs direct and indirect, sunk, and future costs are used in settling at the selling price of the products. Absorption costing has the advantage of considering all the costs incurred by the business since even the fixed costs are incurred for the purposes of manufacturing (2002). Worplestrop Partnership should therefore calculate the product costs using the two approaches for the realization of the two ...
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