Finance and Management Essay Example | Topics and Well Written Essays - 1750 words - 1

Finance and Management - Essay Example This involves the value of raw materials, the work in progress and the finished goods ready for sale. It is the work of the cost accountants to place all costs under consideration so that they are able to determine the value of all inventories (Martin & Wolf, 2008). Cost accounting system has a function of bringing maximum efficiency in an organization. Cost efficiency would ensure that direct material costs, labor and manufacturing are identified and cost controls performed well. This is done by calculating all these costs, adding them up and calculating the cost per unit. Cost accounting systems also facilitates the decision-making systems in any form of organization. The decisions made are both long-term strategic and short-term decisions. In decision making estimated costs are compared to the actual costs and this is only applicable in organizations, which undertake budgeting as one of their strategic objectives (Martin & Wolf, 2008). Product costs are major components of any pro duct manufacturing system. Product costs are traced all the way from the costs of manufacturing up to the point when production is complete. When the company uses the throughput method costs are traced from the least cost methods all the way to the product cost, on the contrary the activity-based method would trace the cost of the product from the highest amount to the least product cost. There are four major costing methods:- Throughput method, direct costing method, full absorption costing method and the activity based costing method (Martin & Wolf, 2008). Throughput method was developed to complement the constraint theory, the method only charges direct material costs to the product cost with the other remaining costs being expensed in the process. The method is simple since it involves the subtraction of direct costs from the sales and there we have our product costs. This method is not recognized for external reporting since it does not provide proper matching as defined by the Generally Accepted Accounting Principles (GAAP), this is despite the fact that it provides rich data for internal reporting (Martin & Wolf, 2008). The other method is the Direct or variable method. Here capitalization if done on only variable manufacturing costs with the other costs being expensed in the period when they are incurred. This method is not also recommended for external reporting since like the throughput method it does not follow the matching principle as per the GAAP. Full absorption method also referred to as the full costing method applies all the manufacturing costs to the product hence the costs do not become expenses until all the goods are sold and therefore the method adheres to the GAAP principles in a bigger way. This method is therefore useful for external reporting by most companies. It is frequently used for internal reporting as well (Martin & Wolf, 2008). Activity based costing is the most modern approach and it is used mainly in product costing. This p roduct cost method was devised to help in the determination of accurate product costs a challenge that is rampant in the operations of most companies. This method quantifies the costs by firstly tracing the costs to their respective activities and thereafter in the second phase, the costs are traced to the products that use the activities. This method is based on the fundamental claims that activities in normal occurrences consume resources and the