EEC: Financial Management

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The response addresses the queries posted in 1511 words with references.

//In this paper, the discussion focuses on different methods of costing as they are used in several small or large scale organizations. The paper will try to define all the costing methods and suggest how EEC can use them. The first method is of absorption costing which expenses all the manufacturing costs using the total direct costs.//
Absorption costing
Absorption costing is a method of costing in managerial accounting, where all the costs associated with manufacturing of a particular product are expensed. The method uses the total direct costs and overhead costs of manufacturing as the base to compute the cost. The direct costs comprise of manufacturing of a product including wages for workers who physically manufacture a product, raw materials and the overhead costs, such as utility costs used in production. Absorption costing is basically of three types:
Job order costing used in printing, furniture manufacturing and bicycle manufacturing where costs are assigned to the product in batches and lots.
Process costing is used in oil distilling and soda manufacturing where costs are assigned to the product, systematically without any discreet batches.
ABC or Activity Based Costing used in firms manufacturing different product volumes which assign cost from cost centers to the product (Lucey, 2003).
Accounting in absorption costing
To do accounting process in absorption costing, direct materials are purchased and recorded as assets. When direct materials are placed for production, their costs are transferred from the raw materials account to the work in process account. The direct labor costs are recorded in a separately created labor expense account when they are incurred. For a whole year, they are transferred from the labor expense account to the work in process account. Initially, overhead costs are accumulated in expense accounts such as office and administrative expenses. When goods are finished, their costs are transferred from work in process account to the finished goods. Food item costs are transferred from finished goods inventory to cost of goods sold.
Here, finished good inventory is an asset, while cost of goods sold is an expense.
The advantages of absorption costing include recognition of the importance of fixed costs in production. The method is popularly used in a number of multinational companies. It ...