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Management Accounting: Manufacture Of The Goods

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Discuss about the Management Accounting for Manufacture of the Goods.



Main use of the Product Costing System

Product costing system can be described as the system utilized by the management of various organizations to have a hold on the cost of product of the manufactured goods or done with an aim for resale purpose. The cost of goods done before the sale is known as product costs. When it comes to the manufacture of the goods, it is the expense done during the process of manufacture. Moreover, there might be a case when the goods are purchased then the product cost can be said to be the expenses done to purchase the inventory and other expenses incurred such as a carriage, freight, etc for the inventory purchase (Drury, 2013). Once the assessment of the manufactured products is done, the further costs needed to seal the products are added to the manufactured cost of products and the product cost in total ascertain the cost of sales. The overall process is defined as the product costing system (Lacoma, 2016). The main aim of the product costing system is to evaluate the above-discussed costs in a chronological manner so that it becomes easy to compute the total cost of sales and final profit can be computed with ease. Further benefits that are derived from the product costing system is that it enables smooth computation of the manufactured cost of goods manufactured per product, ascertainment of the cost that pertains to various level of production, differentiation of the cost incurred on the product with the budgeted cost and the deviation can be traced with ease (Horngren, 2011). Moreover, it supports the management in policies formulation, selling price fixation, shedding light on the profitability in a product wise manner.

The under and over application of overhead is properly traced with the help of this system. Product costing system is the need of the hour because the costs are left unchanged to the service or product as per the scenario. Such a scenario can be witnessed in the case of job costing or service sector costing (Lister, 2016).  When the product costing system is deficient in an organization then there might be an issue of unrecorded expenses or income that are overstated that projects a bad impression for the financial condition of the company as it will influence the profit either an understatement or overstatement will happen. Further, under pricing of the product might happen or inflation of the profits (Lacoma, 2016). The product can be either under or over priced that will affect the company’s goodwill.

Product pricing is mainly concerned with the manufacturing business, however, the application can be witnessed in non-manufacturing industries. When it comes to merchandising companies, it contains buying, as well as transportation of merchandise in the product cost (Vanderbeck, 2013). For example, the producers of inventorial goods, agricultural products, and mining products consider the cost of producing the goods.  The product cost role in such companies is same as that of the manufacturing firms.

When the process of product costing happens, the management considers the overhead that needs to be incurred. During the process of manufacture, there might a difference in terms of the actual cost being incurred with that of the estimated costs. These estimated costs are applicable to various processes of manufacturing by utilizing an overhead rate that is pre-determined. The differences are spotted by the accounts team when the production process ends (Horngren, 2011). The differences lead to under or over application of overheads. Over application of the overhead is a scenario when the applied overheads surpass the overhead that is actual. On the other hand, when the actual overhead exceeds then it is said it be a case of under application of overheads.


It needs to be noted that the concept of over or under application creates a variation in the profitability that the organization estimates at the start of the season and is followed by the maximum of organization (Lanen et. al, 2008). To minimize the difference, the management requires time, as well as efforts so that the rate of overhead can be ascertained with an enhanced level of accuracy as the pre-determined rate is the chief ingredient in the application of overhead. If over or under application happens then the organization have to deal with certain scenarios.

  • The difference is written to Profit and loss account

When this method is put into implementation then the over or under application is moved to the profit and loss account so that the treatment is done in the same accounting year. The major loophole of this method is that the inventory figures gets inflated or understated because the under or over application needs to be distributed between finished goods work in progress and cost of sales (Lanen et. al, 2008).

  • Treatment in Reserve accounts

When this method is used, the over or under applied costs are tuned to the reserve account and projected in the balance sheet. However, this method should not be used as the adjustment for over or under applied overhead must be done in the same accounting year and not be carried forward (Needles, 2011).

  • Inventories adjustment

Work in progress, as well as finished goods and cost of sales is done so that the accounts is brought into connection with the actual cost. The overheads that are applied in excess or low must be distributed to the supplementary rate in work in progress, the cost of sales and the finished goods.

  • Adjustment of over or under application in the cost of sales

The cost of sales is determined by the accumulation of all the expenses that pertains to selling and distribution and then the addition is done to the cost of goods sold. In the case of an under application or over application, the same gets shifted to the cost of sales account. It can be done in a monthly manner or annually.

ABC even known as activity-based costing is a mechanism that is used to assign products, tasks, or acquisition that is based on activities that flow into them and resources consumed by such activities. ABC can be contrasted with the traditional mechanism of costing that sometimes assigns cost by utilization of the hypothetical allocation percentage for overhead that is termed as indirect costs. Therefore, ABC estimates the cost of goods sold and gross margin in a different manner for different products.  ABC should be introduced into the organization (Charles, 2012). The cost accountants have a clear understanding that the traditional system of cost conceals information when it comes to an individual product and services. Hence, a shift to ABC will lead to understating the real cost of the products, as well as services in an accurate manner. The implementation of ABC is done by the companies by identification of the products on an individual basis that is not profitable, ascertainment of the true costs so that pricing policy can be supported and revealing costs that are unnecessary so that it can be eliminated with ease. Firms that use ABC attain the objectives in an effective manner (Shim & Siegel, 2009). The main benefit of ABC lies in the fact that the same accounts are influenced however different perspective is used.  ABC helps in bringing enhancement in the margin hat is reported and even the profitability. Such an outcome is possible when ABC projects where to adjust the models of pricing.  The areas where ABC can show vast improvements and benefits are cost accounting, budgeting, financial accounting, etc (Venanci, 2012). ABC scores over traditional method but needs to be noted that ABC is not free from deficiencies. 



Charles, T.S 2012, Cost Accounting: A Managerial Emphasis, Pearson Education

Drury, C. M 2013, Management and cost accounting, Springer.

Horngren, C 2011, Cost accounting, Frenchs Forest, N.S.W.: Pearson Australia.

Lanen, W. N, Anderson, S & Maher, M. W 2008,  Fundamentals of cost accounting, NY: Hang Loose press

Lacoma, T 2016, The Advantages Product Costing Offers in Financial Accounting, viewed 20 May 2017 

Lister, J 2016, Product Costing vs. Cost Accounting, viewed 20 May 2017

Needles, S. C 2011, Managerial Accounting,  Nason , USA: South-Western Cengage

Shim, J. K & Siegel, J G 2009, Modern Cost Management and Analysis, Barron's Education Series

Vanderbeck, E J 2013, Principles of Cost Accounting, Oxford university press

Venanci, D 2012, Financial Performance Measures and Value Creation , State of art . New York: Springer.

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