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

Costing Principles - Essay Example A cost purpose is an action or product for that the total or unit cost is to be computed. A cost objective may be the product manufactured or the service delivered, or it may be a department, a course, or a function, all of that are referred to as cost centers. The cost axis is the least unit for that costs are mounted up for reporting and analytical functions. Organisations whose products or batches of products are treated as individual jobs use job-order costing systems. Airplane producers and parts suppliers for large manufacturing Organisations, such as tool and die shops, are examples of the users of this system. Organisations use process-costing systems with homogeneous products such as crude oil, chemicals, and grains. Both job-order and process costing systems function to build up unit costs of production, but since of the inherent disparities in the physical characteristics of the products the two methods vary. Standard costing systems absorb standard direct materials, standard direct labor and standard company overhead into production costs. Standard costs are estimated costs that may have a close relationship with budgeted costs. Standard costing systems are widely used by manufacturing organisations. (Shank, 1993, 32-33) The official statement of generally accepted accounting principles, demands that the assessment of inventories by manufacturing firms for external reporting include the full cost, that is, direct materials, direct labor and total company overhead. This system of product costing is called absorption costing or full-absorption costing. (Antos, 1998, 13-14) GAAP also requires that for external reporting actual costs should be used except where the estimated costs are not materially different from actual costs. Direct Costing Direct costing differs from full-absorption costing only in regard to one category of costs, fixed company overhead. Direct costing includes direct materials, direct labor, and variable overhead in the product costs. Fixed company overhead is charged directly to the accounting period. Ending inventory, therefore, never includes any fixed overhead. This system of costing has not been approved for external reporting purposes by GAAP, but may be used for internal purposes. Activity-Based Costing A management tool named activity - based costing (ABC) has turn out to be one of the more extensively clinch of new management styles over the period of the last ten years. Though its nucleus lies in cost accounting, ABC has engrossed the consideration of business managers in general, and has been the focus of researches in the Harvard Business Review and Fortune. Not simply is it a foremost subject matter in business, it has been accepted in parts of government like USA, such as the Department of Defense and the IRS. What commenced as effectively an