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Finance and Management - Essay Example

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Date Profit making businesses have to manage their production costs in order to maximize profits and the wealth of their shareholders. Manufacturing firms therefore have to determine the costs of their products and reduce the cost elements using different costing methods…
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Finance and Management
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Finance and Management

With the use of the budgets, businesses will produce different management reports to the various stakeholders. The reports will be important in the evaluation of the business performance and act as a motivation to the employees. Product cost can be defined a s the total costs that is incurred in the manufacturing of goods or the provision of servicers. Various cost elements are involved in the process of producing a product. These include material cost, labor costs, overhead costs, and other expenses (Polimeni, 2000). The sum of these costs constitutes product costs. Material costs are labor costs are direct cost that are associated with the goods and are easy to determine when determining the cost of products (Epstein & Lee, 2001). Material costs can be determined from the purchase receipts that are made. Labor expenses are also determined from the salaries and other allowances that are paid to the workers and other experts that are involved in the production of goods and services. The last component of product costs that includes the overhead expenditure poses a challenge to cost accountants on how to incorporate them in the product costs (Horngren, 2009). There are different cost accounting methods that can be used to allocate these costs to the products to determine the total costs of the products. Product costs are necessary for decision-making and for external purposes. Product costs can be determined using the following methods. First, marginal costing system can be used in calculating the product cost. In this method, only the variable costs are used in arriving at the product prices (Polimeni, 2000). The organization will therefore use these costs to make decisions. Fixed costs and sunk costs are not included in the calculation because they are past costs which cannot influence the future managerial costs. Product costs determined in this manner will only be important in making internal deci9isions and not for external uses. The second cost methodology that can be used is the total costing or absorption costing method. In this method, the prices of products are determined by adding all the costs incurred in production including the fixed costs and other overhead costs (Epstein & Lee, 2001). All the costs are considered relevant because the management incurred the cost in the process of making the product. The method of should be used in determining the selling price that is charged on the products because it incorporates all the costs involved in the process (Lucey, 2002). The prices can therefore be determined by adding a desired margin on the cost of the goods. Moreover, the product costs can also be determined by the use of activity based costing. Activity based costing assists in the allocation of overhead costs that are then summed up to the variable costs to arrive at the total product costs. In this method, the overhead costs are allocated to the various cost centers and using the cost drivers. The method helps in charging costs to the various activities. This method has been used widely to control the costs of activities and make managers do away with non-essential activities that do not add value to the product manufacturing. Through the elimination of the dummy and redundant activities, the management will be in a position to achieve efficiency and effectiveness in the process. The last costing methodology that can be employed is the throughout costing. This method is criticized by the accountants and is ... Read More
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