Product Costing Essay Example | Topics and Well Written Essays - 1750 words

Product Costing - Essay Example This implies that, the cost of a finished unit in inventory will include direct materials and labor, and both fixed and variable manufacturing overheads. It is notable that, absorption costing is the most preferred method for external reporting as per the Generally Accepted Accounting Principles (GAAP). Absorption costing is fundamental in tracing the variable costs of production and the fixed costs attributed to the production of the product (Riahi, 2001). It is imperative to note that, absorption costing is dissimilar from the other costing methods since it takes into account fixed manufacturing overhead (the counting expenses ) such as factory rent, utilities and amortization (Riahi, 2001). Absorption costing forms three different types of costing, which include job order costing, process and ABC costing. Job order costing Considering the job order costing, the costs are assigned to the product in Batches or lots (Avis & Killick, 2009). Job order method is used in companies that o ffer bespoke or distinctive products or services. It is common in service industries that, serve customers with inimitable needs. Such services may include tracing of the number of hours spent on each individual client’s account (Avis & Killick, 2009). Fundamentally, the manufacturing cost categories include direct materials, direct labor and manufacturing overhead. All these jobs are counted as inventory until the good or product is sold. It is essential to note that, the job order cost system requires the manufacturing costs recorded in a document called the job cost sheet. This sheet provides a detailed record of the cost incurred to complete a specific job. Consider the following illustrations that, indicates how three kinds of manufacturing costs are allotted in a job order cost system. Direct materials job cost sheet Direct Labor manufacturing overhead Fixed overhead rate It is noticeable that, direct materials and direct labor costs are allotted to jobs differently tha n manufacturing overhead costs. For instance, the direct costs, requires keeping of track of the costs of specific jobs with a set of records referred to as the source documents. Essentially a source document is a hard copy document similar to the receipt issued after payment (Horngren, Datar & Rajan, 2012). However most companies use paperless system where information is stored in electronic databases. On the other hand, manufacturing overhead comprises of the costs that cannot be directly traced to particular jobs. It is imperative to note that, on assigning these jobs, accountants should use a predetermined overhead rate based on some secondary allotment measure and cost driver. The material requisition form refers to the form that lists the quantity and cost of the direct materials used in a particular job. This is normally done before materials are used on a job. The fundamental purpose of this form is control the physical outflow of materials from inventory and into production . Similarly, a direct labor time tickets refers to a source document that shows how much time a laborer spends on a range of jobs per week. On the other hand, job cost sheet is a document that gives a summary of all the costs incurred on a specific job. Process costing Process costing refers to a costing method where all costs are