Management Accounting: Product Costing in Australia and New Zealand

This report delves into the critical area of product costing within management accounting. It begins with an introduction to product costing, emphasizing its importance in strategic decision-making and its evolution from traditional methods to contemporary automated processes. The report outlines key principles of product costing, including the treatment of direct materials, labor, and expenses, as well as the principles of double entry and prudence. It then examines product costing practices in Australia and New Zealand, comparing traditional costing systems with Activity-Based Costing (ABC) and highlighting the shift towards ABC in Western countries. The report identifies causes for differences in costing practices, such as legal and cultural influences, and concludes by emphasizing the relevance of product costing and the advantages of ABC in today's business environment. The report also includes a critical review of the differences between the principles and practices, and concludes that product costing is essential for business profitability.

Running head: MANAGENT ACCOUNTING
Name of the Student
Name of the University
Author note

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Table of Contents
Introduction:...............................................................................................................................2
Principles of Product costing:....................................................................................................3
Practices of product costing:......................................................................................................5
Critical review:...........................................................................................................................6
Conclusion:................................................................................................................................7
References:.................................................................................................................................8

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Introduction:
Product costing is one of the most important aspects of cost accounting and forms an
integral part of it. It refers to the amount of expenses involved in the production of any
product and mainly comprises of three main parts; direct material, direct labour a direct
expenses. It is widely regarded as an important component of any business organisation for
taking strategic decisions. As has been indicated by John, in the Journal of Accountancy, that
that in today’s ultra-competitive business environment, accurate product costing has become
more important critically for any business’s survival.
The usage and application of product costing has now undergone a massive change, since its
inception. In the 40s, product estimates usually contained, only the total manufacturing costs.
Subsequently in the 50s, variable costs and fixed costs were also introduced. In today’s ultra-
competitive environment, most of the manufacturing operations have become automated. All
this has been done with the intention of saving time and money, which are regarded as
important tools for sustenance in the manufacturing business. Now, production remains
depended on automated technological production processes. Any change in the cost of
manufacturing has a direct impact on the profit earning capability of the companies. As a
result of which, the importance of product costing cannot be downplayed. Moreover, today
businesses have become more customers centric. More focus is being provided to the
requirements of the customers and any slight change in their specifications and demands
would result in the alterations of the products and costs. With this in mind, a detailed
presentation of the prominent principles of product costing, the practices followed by the
manufacturing companies in Australia and New Zealand have been provided. Any difference
or gaps between the practices and the principles followed have been reviewed critically.

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Principles of Product costing:
Product costing is a specific kind of methodology associated with the subject of
managerial accounting. Product costing is made and prepared with the purpose of accurately
determining and ascertaining the cost of a particular unit of production. In other words, it is a
process of identifying and recognising various important cost components which can be
addressed specifically in order to precisely ascertain the different kinds of cost of any product
by purchasing, designing, engineering and packaging the product. The various important
aspects or rather parts of product costing are as follows, which are direct materials, direct
labour as well as direct expenses including factory overhead. For the efficient ascertainment
of costs, a series of principles are followed. Each item of product costing represents a case
and effect relationship, In case of product costing, for all the direct materials, labour,
expenses or the factory overhead, charging of cost occurs in the books of accounts, only
when they are actually incurred. One of other principles of product costing states the fact that
in case of product costing, the convention of prudence is not followed here. If there any
factual information, only they are depicted. In case of any kind of contingencies, they are to
be shown separately and distinctly. With the intention of avoiding any unnecessary errors, in
case of product costing, the principles of double entry should be duly followed. In association
with this, any kind of past costs associated with any particular product should not become a
part of any kind future costs.
Practices of product costing:
Various countries have different costing practices and calculation of product costs and
other costing practices are no different. In this essay, focus is being thrown in the product
costing systems employed in New Zealand and Australia.

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In Australia as well as in New Zealand, the manufacturing companies have seen a lot of
dramatic changes in the usage and implementation of the costing practices from the erstwhile
costing practices which generally involved, only the total costs which were closely associated
with a particular product (Ingenbleek, Frambach and Verhallen, 2013). Back in the earlier
periods, only total costs which were involved in a particular product were treated as a part of
the product costs. In the traditional product costing systems, mainly the cost was being
allocated into three main costs:
 Direct Material: They were directly used in the manufacturing processes, example
telephone wires in case of Telstra Corporation.
 Direct labour: They are directly involved in the production process and practically
execute the production process, example labour involved in the conversion of raw
milk for Fonterra, which is New Zealand’s largest milk producing company.
 Direct expenses: This involves payment of those expenses, which were incurred in
the production of goods and services, example freight and insurance paid for the
procurement of the raw materials.
When, the case of Fonterra is taken, which is a New Zealand milk producing company, it
could be seen that the company calculates the product cost by taking into account both the
direct as well as the non-direct costs such as supply chain costs, collection costs of the
necessary containers and others such things. In the case of most of the New Zealand
companies, the following product cost flow is followed:

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(NZICA, 2018)
With the help of the following diagram, the actual procedure of ascertaining the product costs
has been stated. It is mostly followed by companies operating in New Zealand, Hong Kong
and some other Asian countries.

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(Source: CIMA, 2013)
In the present case scenario, not only the direct costs but also those kinds of costs, which are
ancillary to the production of the main products are also included. This holds true especially
for the Australian as well as many other Western countries such as UK and the USA. In
addition to this, the companies now have started adopting new measures of measuring their
costs. Due to this, the prominence of ABC costing procedure has soared high and it is being
implemented in almost every organisation present in these countries (Elhamma and Zhang,
2013). Presence of a strong organisational structure, cooperative top management and support
of the management has led to the widespread implementation and success of the ABC costing
process (Drury, 2013). Most of the technology relied companies like Telstra or even core
mining companies like Rio Tinto and BHP have understood the significance of ABC. AS a
result of which, they have strongly advocated for this costing procedure (Schmidt and
Nakajima, 2013). In ABC costing, activities have been recognised and segregated into one

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group on the basis of their importance and activities. The complete pictorial presentation of
the entire process of ABC costing has been provided below:
(AASB, 2018)
The usage of various kinds of cost drivers in influencing the decisions of allocating the cost
to different indirect cost related activities is the hallmark of the method of Activity Based
Costing.
Causes of Difference:
The major causes of difference in the application of the different kinds of product
costing procedures is due to several kind of intricate and inter-related reasons. The prevalence
of the product costing, based on the traditional method of costing is mostly prevalent in the
country of New Zealand and Hong Kong and many other Asian countries. Here the costs are
calculated by the traditional procedure of allocating the cost of the product of any product in
terms of direct labour, direct expense, direct material and factory overhead. Whereas in the
case of the western countries of UK, USA and Australia, the prominence of the famous ABC

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method of costing is much more prevalent, when compared to the traditional method of
product costing.
Traditional and ABC Costing systems:
Traditional costing systems apply direct as well as indirect costs to different products
which is based on a predetermined overhead rate. Unlike ABC, traditional costing systems
treat overhead costs as a sole pool of indirect costs. Traditional costing is optimum when
indirect costs are truncated when compared to direct costs. On the other hand, Activity based
costing systems are far more accurate and precise than their traditional counterparts. It is
because they provide a more exact breakdown of indirect costs. However, the ABC costing
systems suffer from greater problems (‘Australian Accounting Standards Board (AASB) –
Home’, 2018). In the practical business scenario, they are far more complex and more costly
to implement. As a result of which, the leap from traditional costing to activity based costing
has been difficult, and still many countries still continue to cling to the traditional methods.
Critical review:
Some important aspect of product costing was revealed with the presentation of the
principles and the current practices of product costing. When the principles and the practices
are being compared against each other, various some stark differences in terms of cost
allocation procedure had been seen in the case of traditional costs and the new method of
ABC costing. This is pretty evident due to the presence of some external cost drivers which
heavily influence the costing procedures and the allocation procedures in the case of the ABC
costing method. This is just a tiny example of the different kinds of differences which exists
between the two systems. The major reasons for such kind of diverse differences, is the

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presence of the various kinds of factors, some of the prominent ones have been mentioned
below:
 The presence and the prevalent practices of the existing legal systems in the different
countries play an important role in influencing the cost and other accounting practices
of the different countries.
 Maintaining provisions for different kinds of financing is also a significant factor in
this regard.
 The link between the subjects, functions, procedures and practices of accountancy and
tax laws are another significant factor which plays a crucial rule in the costing and
accounting practices between the various countries all over the world.
Presence of the different kinds of cultural differences and other external differences also
exercise a significant amount on the accounting practices of various countries
Conclusion:
The concerned essay successfully delves into the foray of product costing. The
importance of product costing, its involvement in the company’s overall scheme of things, is
a brief testimony to the importance it possess. It has a direct and relevant importance on the
profitability of any company. In this essay, some important principles of product costing and
the existing practices of ABC costing had been discussed and analysed. It could be seen, that
the ABC costing is a major up gradation over the previous costing structure, which used to
put major emphasis on the major direct costs only. This goes on to prove, the importance of
product costing and the relevance of ABC in today’s economic environment.

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References:
(2018). Retrieved from http://www.aasb.gov.au/admin/file/content102/c3/appendix_g_-
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2018].
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16577.aspx
Australian Accounting Standards Board (AASB) - Home. (2018). Retrieved from
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business strategy and performance in Moroccan enterprises. Accounting and
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Paper10.pdf [Accessed 16 May 2018].

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Ingenbleek, P., Frambach, R.T. and Verhallen, T.M., 2013. Best practices for new product
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