Internal product costing system is a method of assigning the product costs to different products and services produced by the firm. As such a proper and balanced internal product costing system allows firms to better manage their costs and assign correct costs to the firm. (Kinney & Raiborn, 2008) Correct product costing therefore allows the firms to better analyse its profitability also and accordingly change its strategy. It is also critical to note that a complex internal product costing system may be expensive to manage and operate and as such it is important that the firm should use a simplified and comprehensive costing system to better manage and control its costs.
There are important components of a good costing system including cost identification, cost measurement and its assignment to the products and services. Based on these three criteria, it is critical to note that firm’s cost identification criteria may not be appropriate given the fact that it outsourced some of its activities for which the assignment of costs and their identification may be difficult. For example, some of the cost savings from the outsourcing are being taken away some additional costs which firm has to incur in order to allow the smooth function of the outsourcing activities. As such this cost component may not be fully identifiable in total product cost of the firm and therefore the appropriate margins may not be set. Similarly, the costs at controller’s division are not also fully identifiable as the despite the outsourcing the overall cost is increasing mainly due to the lack of proper job costing procedures.
Product range of the firm includes products which are either sold as standalone products or further processed to fit to the needs of the customers. Such a system would naturally require that the firm must either implement process costing or job costing system in order to realistically