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Product Costing

Product costing is used to allocate costs, such as materials costs, direct labor costs, and manufacturing overhead, to units of production. Product costs are then used to prepare reports and financial statements, predict costs based on different levels of activity, analyze cost behavior, and determine relevant costs for decision-making.

Total Cost (TC) = Variable Cost (VC) x # of Units + Fixed Costs (FC)

Variable Costs: On a per-unit basis, variable costs are constant. However, total variable costs increase or decrease in proportion to changes in the level of activity.

Step Variable Costs: Step variable costs remain constant over intervals of activity, but increase or decrease as the activity level rises or falls to a new interval level. For example, imagine a new worker must be hired for every 1,000 units of production. The additional labor cost is a step cost that goes up every 1,000 units. The trick is to plan production so step costs are maximized; for example, it may be beneficial to produce X999 units to maximize production without having to hire a new worker.

Fixed Costs: Total fixed costs (often indirect costs or overhead) are not affected by the level of activity within a relevant range. However, the fixed cost per unit decreases as the activity level rises, and increases as the activity level falls.

Mixed Costs: Mixed costs are expenses that contain both variable and fixed elements. Electricity is a common mixed cost. A basic electricity bill for heating, lighting and appliances will be fixed, regardless of how active the business is. If a manufacturing business runs its machinery longer, or a hospital takes in more patients, their electricity bill will rise or fall variably with the level of activity.

Absorption Costing: Absorption or full costing takes all manufacturing costs, fixed and variable, and assigns them to each unit of production. Absorption costing is used in both process and job-order costing.

Variable Costing: (also called Direct Costing or Marginal Costing) treats only those costs of production that vary with output as product costs. Variable costing is useful in looking at income from a contribution approach and conducting a CVP analysis because it separates variable and fixed costs. The cost of a unit of product consists of direct materials, direct labor, and variable overhead. Fixed manufacturing overhead, and both variable and fixed selling as well as administrative expenses are treated as period costs and deducted from revenue as incurred.

Categories within Product Costing

Segment Reporting

Postings: 26

A segment in an organization is simply a part of the organization or an activity that managers would like financial information from in order to make decisions and evaluate performance.

Activity-Based Costing

Postings: 16

Activity-based costing looks at all activities that cause the consumption of overhead resources. Costs are then attributed to products or customers based on the extent that the activity is used up by the product.

Job-Order Costing

Postings: 83

Job-order costing is best suited where a business manufactures or produces many different products each period, products are manufactured-to-order, and the unique nature of each order requires tracing or allocating costs to each job and maintaining a cost record for each job.

Process Costing

Postings: 6

Process costing is appropriate where there are many units of a single product, each are indistinguishable from other units, and the identical nature of each unit of product makes it reasonable and efficient to assign the same average cost per unit.

Transfer Pricing

Postings: 3

Transfer prices are the prices at which internal company departments, segments or division transfer goods or services to one another.

Accounting Cost Estimation

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