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(PDF) Analysis of the Product Cost and Price Variation

Added on - 15 Jun 2021

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INTRODUCTIONDetermination of the cost of the product plays a very important role in the effective and smoothfunctioning of the company. It is because of the fact that after determining the cost of the productonly the amount of the profit margin is decided and thereafter the sale price comes into thepicture. Therefore, determining the cost price of the product is the base for determining the priceat which the goods are sold to the customers. If the base cost is not determined in an effectivemanner then the company will not have the long term growth prospective rather than it will workon short term growth prospective and soon it will be out of the market. Thus, in order to avoidthe situation of being exit from the market, it is necessary that the company shall have theprocess to determine the cost in the correct and accurate way giving the correct picture of themarket.Although there have been the various ways through which the cost of the product can bedetermined. But through this report only two methods will be discussed namely Activity basedcosting and the traditional method of costing. Both the methods have certain advantages anddisadvantages over each other. The application of it totally depends upon the needs and therequirements of the business. At first in the report, the method of costing which has been used isof Traditional method. Secondly, the method of costing which has been used for the product isActivity Based costing. Thirdly, the results under both the methods have been discussed as towhy the costs of the products under the two methods are not similar in any terms. Fourthly, thecost benefit analysis has been made of the second method of costing which has been conductedon the basis of the activities. After having the detailed analysis of the cost and benefits, thediscussion regarding the implementation of the activity based costing method in the company hasbeen made.Above listed ways of determining the cost of the products has merits as well as demerits. Firstly,activity based costing facilitates the system whereby easy demarcation will be made between thenature of the costs as fixed and variable whereas on the other hand traditional costing systemdoes not facilitates the same rather it becomes more difficult to separate when the size of thebusiness grows. Another advantage of the activity based costing on the similar terms is that theproduct cost can be obtained at any time of production as when the particular activity gets ended
whereas the traditional method provided the product cost once the product gets prepared(Cooper,2013). There is one disadvantage of the same method that the degree of occurrence of the errorsis high because of wrong estimation of the activities and the cost pool along with the cost driverswhereas the degree is less under other method as it apportions the cost on the premise of the ratewhich is predetermined on some specific base like machine hours and etc. Therefore, themethods whether it is activity based or rate based, has some merits and demerits.Keeping the above in consideration, this report is being laid down with appropriate divisions andthe separate figures.CASE DISCUSSIONThe company is operating with the two products namely simple luggage and complex luggage.As per the separate excel sheet, the following is the cost of the above said products under the twodifferent methods of costing:S. No.ParticularsTraditional (In $)ABC (In $)1Simple Luggage14782214652Complex Luggage6817160145TWO METHODS - COMPARISONThe aforesaid table depicts that costing of the product simplex luggage is less in the traditionalcosting method and higher as per the costing which is activity based (Haddai and Seyednezhad,2015). The major reason for such a difference is that the overheads charged to the product havebeen on the basis of the rate predetermined through machine hours. Similarly for the case of thecomplex luggage the costing is higher under traditional method; again the reason is only becauseof overheads charging on the basis of the rate based on the direct labor hours.On the other hand, the other method determines the cost of the product through the consumptionof the activity. The simple luggage has consumed the activities determined in higher of thecomplex luggage and due to this excess consumption; the pricing under the simple luggage ishigher as compared to pricing under complex luggage.
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