Costing Methods and Importance of Accurate Product Costing

Contents
EXECUTIVE SUMMARY.................................................................................................................................2
INTRODUCTION...........................................................................................................................................3
COSTING METHODS.....................................................................................................................................3
IMPORTANCE OF ACCURATE PRODUCT COSTING.......................................................................................3
WAYS TO DEAL WITH APPLIED OVERHEADS................................................................................................3
ACTIVITY BASED COSTING – AN ANALYSIS...................................................................................................3
CONCLUSION AND RECOMMENDATION.....................................................................................................3
REFERENCES................................................................................................................................................3
EXECUTIVE SUMMARY
Managerial accounting plays the significant role in helping the management of the company in
making the useful and effective decision. As the title suggests, the basic purpose of the report is
to discuss and analyze the different costing methods. The report has been prepared and presented
with the four basic aims. One of the basic aims is to understand how the costing is being done in
the mode of traditional costing and the activity based costing. Second major aim is to analyze the
importance of the correct and the accurate product costing. The third major aim is to discuss as to
how to deal with the case of the under or the over applied overheads. The last major aim is to
discuss the advantages as well as the disadvantages of the activity based costing method. With
these major aims in relation to the report, proper headings have been given so as to enable the
users to have the meaningful and efficient decision.
INTRODUCTION
The costing of the product has the significant effect on the decision making power of the
company. It is because only on the costing of the product, the profit margin has been marked and
thus the selling price is determined. If the costing of the product is not determined correct then

the selling price will be futile for the business. Due to this very fact, the report has been prepared
with regard to the discussion of the costing methods.
At first the cost per unit of two models – basic model and advance model of the company Sewing
Easy Limited has been calculated using the traditional method of costing then the cost per unit
has been calculated on the basis of the new method activity based costing method. The
calculation has been provided in the separate excel workbook. After having the calculated cost
per unit of each model, the significance as to the product costing which shall be correct and
accurate has been discussed. Then the ways has been listed and describes as to how to deal with
the applied overheads which can be under or over. Lastly and the most important the benefits and
the limitations of the activity based costing has been discussed in detail. The report has then
ended up with the appropriate conclusion and recommendation. The data for preparing the report
has been obtained from the reliable sources and the same has been listed in the references
section.
COSTING METHODS
In the given case study, two methods of costing have been detailed. One is the traditional method
of costing and other one is activity based costing method. The traditional method of costing lays
down that all the indirect costs which are not directly related to the products of the company will
be allocated on the basis of the rate which is predetermined on the basis of either machine hours
or the labor hours.
On the other hand activity based costing is the method under which the costs are allocated on the
basis of the activities which are defined for the manufacturing of the product. It helps the
company in allocating the costs of the product in accordance with the activities which is
undertaken by the company. The main aim of this method of costing is the identification and
specification of the cost drivers which help the company in estimation of the cost (CIMA, 2016)
In the given case, the company has adopted both the methods and has identified the cost per unit
of both the models – simple and advance.