The Importance of Accurate Product Costing

Running head: THE IMPORTANCE OF ACCURATE PRODUCT COSTING
The Importance of Accurate Product Costing
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1THE IMPORTANCE OF ACCURATE PRODUCT COSTING
Executive Summary:
The current report deals with the product costing associated with traditional costing
system and activity-based costing (ABC) system. It has been found that the traditional system
has certain loopholes, which could be minimised with the help of the ABC system. This is
because this system takes into consideration accurate cost data and cost drivers for assigning
costs to products and departments. It has been assessed that Just-in-Time system is a technique
through it is possible to deal with the issue of under or over allocation of overhead.

2THE IMPORTANCE OF ACCURATE PRODUCT COSTING
Table of Contents
1. Introduction:................................................................................................................................3
2. Product cost under traditional system and activity-based costing (ABC):..................................3
3. Benefits of ABC system for a manufacturing company:.............................................................6
4. Ways of selecting cost drivers in ABC system:...........................................................................7
5. Reasons behind the occurrence of under or over allocation of overhead and the techniques to
deal with them:................................................................................................................................8
6. Conclusion:................................................................................................................................10
References:....................................................................................................................................11

3THE IMPORTANCE OF ACCURATE PRODUCT COSTING
1. Introduction:
With the increase in selection of products offered to the consumers based on variance in
size and designs along with colour, all business organisations have to deal with enormous
products. This has resulted in the evolution of product costing. Product costing is the accounting
technique of ascertaining the various business expenses related to the development of business
products (Cinquini et al. 2015). The current report would discuss product cost under the
traditional costing system and activity-based costing (ABC) system. The second portion would
focus on highlighting the benefits of the ABC system from the perspective of a manufacturing
organisation. In addition, the report describes the ways through which the cost drivers could be
chosen in the ABC system. Finally, the report would shed light on depicting the reasons behind
the occurrence of over or under allocation of overhead and the ways through which such
occurrence could be dealt.
2. Product cost under traditional system and activity-based costing (ABC):
Traditional costing system:
Traditional costing system is the system of distributing factory overhead to the products
depending on the volume of production. In this method, the application of overhead is made
depending on either direct labour hours or usage of machine hours. In this context, Annan et al.
(2016) cited that cause and effect techniques are used in this method and it considers direct costs
as well indirect costs and other business expenses. Under direct costs, certain matters are
included, which are the material costs used in the process of production and the labour cost of
creating products. The indirect costs consider those expenses, which could not be estimated