Management Accounting Report: Product Costing in China & Australia

This report provides a comprehensive overview of product costing, beginning with an introduction to the concept and its importance in determining product prices and optimizing resource utilization. It then delves into the principles of product costing, differentiating between fixed and variable costs and exploring the evolution from traditional costing methods to Activity-Based Costing (ABC). The report examines the practical application of product costing in two Asia-Pacific countries: China and Australia. Case studies, including Xu Ji Electric Co. Ltd. in China and an agricultural farm in Australia, are analyzed to illustrate the implementation and effectiveness of ABC. The report highlights the challenges and benefits of ABC, particularly in dynamic environments, and provides a critical analysis of the practices in relation to the principles. The conclusion summarizes the key findings, emphasizing the role of ABC in enhancing management decision-making. The report also includes references to the sources used.

Management Accounting
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Table of Contents
Introduction.................................................................................................................................................3
Principles of Product Costing.......................................................................................................................3
Practices of Product Costing........................................................................................................................5
China........................................................................................................................................................5
Australia..................................................................................................................................................7
Critical analysis- Principle............................................................................................................................8
Critical analysis- practices............................................................................................................................8
Conclusion...................................................................................................................................................9
References:................................................................................................................................................10
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Introduction
Product costing is defined as the accounting process to determine different allied
business expenses to create any business product or services. This practice can be
instrumental to enable optimum level of quality of any product or service with the
reliability and productivity factor at the lowest possible cost. The concept of effective
product costing does not mean curtailment of cost. This concept endorses maximum
utilization of resources in effective manner to get best possible business return out of it.
(Busa, 2011)
In this article, the principles of product costing will be discussed with the practices in
perspective of two Asia Pacific countries namely China and Australia. This article will
highlight with critical analysis of product costing practices in respect of principles to
evaluate the deviations of practices from principles in respect of these two countries.
Principles of Product Costing
As per theory, product costs compilation to determine pricing and respective product
mix is involved normally by tracking inputs to outputs. Anyway, till the recent
development of Activity based Costing or ABC, the theorists defined product costing
with own views. There are two types of costs mainly involved in the practice of product
costing- fixed and variable costs. These costs are considered in different ways by the
critiques. As fixed costs are framed in definite manner, difference of opinion persists in
case of determination of variable costs. Basic concepts of fixed costs is defined as
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those costs which may change as per the output on per unit basis with the quality
remained constant in totality irrespective of the quantity in the specific short period as
considered. For determination of variable costs, the same is defined as a changing
cost, which normally cares with the level of outcome in a short run. To make more
practical approach, the practitioners normally used to consider total costs, with the
consideration of allocation of all costs to the outputs. Ultimately the measurement of
product costs is represented by full variable cost and a logical share of fixed costs as
per allocation to the product on the base of respective varieties. The traditional
academic logic to justify the fixed cost as provision of basic operating ability prevailed
for last 20 years. These costs do not change relating to any future decisions. Hence the
theory of conventional variable costs is represented as short run costs and is
instrumental for decision-making related to product and pricing mix.
(T.J.BrignallL.Fitzgerald R., 1991)
Cooper and Kaplan had evolved Activity-Based Costing or ABC in 1992. This is a new
approach to calculate product costs. (Kaplan, 1992) This concept is at par with the
concept of Shillinglaw known as Attributable theory. (Burrows, 2013)
ABC is emphasizing to have a better understanding of indirect cost implication. This
system is instrumental to discover the causes of overhead costs to be spent with the
variance over time and is focused on the issue of the element of generation of costs that
differs from the traditional theory of only allocation of costs. In this system, the factors
for generation of costs are known as cost drivers and the attitude of costs will be
determined by the element of generating costs. Traditional cost systems are mainly
based upon volumes with the conception that resources are procured proportionately to
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the number of produced units. The costs not variable to volume are collaboratively
considered as overhead pools. They are subsequently allocated to products on the
basis of miscellaneous allocation. System of ABC endorses the concept of collecting
costs to the activity cost pools. They are functional followed by subsequent allocation to
products through use of individual ABC cost drivers. There are two types of cost drivers
considered for tracing the cost of resources, which are consumed for products or
services. The first type is connected with unit volume, whereas, the second type is not
related to unit volumes; instead it is connected with recognition of activities not related
with volume drive costs. Example of first type is allocation of labor overhead by
production volume, whereas example of second type is allocation of invoicing costs to
the number of executed orders, connected with related batch production. (Ken C.
Snead, 2005)
Practices of Product Costing
China
This is the case study of Xu Ji Electric Co Ltd of China. Prior to product costing
practices of ABC, the company had followed traditional costing. This practice followed
the concept of allocation of albor cost to be charged in two- phased system- first, to
allocate in production department and then to finished goods. This practice was
followed due to difficulty in allocating direct labor cost to products. Below chart can
feature the erstwhile process of cost allocation of the company:
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Due to changed market scenario of open economy, huge competition arrived in the
Chinese market. The deficiency of traditional costing system had forced Xu Ji to prove
its sustainability in the competitive market by introducing more scientific system. Hence
the company had opted for ABC system of product costing to ensure better and
transparent type of costing system. Main objectives for this adoption are to ensure
tracing of direct labor cost to the product and respective clientele contracts, and to
ensure allocation of manufacturing overheads on the basis of latest direct labor hours to
contracts. After successful implementation of ABC in 2003, some recurring problems
were solved with introduction of some new IT related process regarding ABC system. In
2004, the company was refurbished as independent companies with different units.
Followed by this restructuring, internal set up of management was changed. This had
resulted to non-requirement of some erstwhile cost drivers. Due to continuous change
of organizational structure and change of management since 2003, practices of product
costing had been upgraded.
It is proven that practice of ABC system have the ability to work more effectively in an
environment which is relatively stable, but it’s worth as costing system may not prove
effective in unstable or changing environment. Moreover, major corporate events line
acquisition or implementation of ERP can have distinct effect on the commitment of
management to enhance the development of ABC with the probable adverse impact of
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ABC information. For the case of Xu Ji, it is found that ABC system proved
unremarkable as they had been able to tackle only direct costs along with
manufacturing overheads variable in nature. Application of ABC is featured through
following chart for Xu Ji:
Traditional costing system was not able to allocate direct labor cost to output. But the
adoption of ABC can prove its worth to ascertain information of product cost. The
implementation of ABC in sales activity by Xu Ji management was remarkable effort. It
has proven its effectiveness to consider ABC as management tool to ensure more
control with desired level of decision making for the company. (Liu & Pan, 2003)
Australia
Refer to the case study of an agricultural farm for ABC system, it is found that Activity
based costing system had covered all types of operating costs for direct inputs. Then
analysis of activity had been done to ensure identification of all activity pools for the
purpose of activity model. Through the observation and the interviews of different
stakeholders 12 activity pools related the agricultural macro activity had been identified.
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All these activity pools are related to operation of the farm under normal situation of
favorable weather. As this activity is sensitive, some micro activities can be taken care
in different manner to combat extreme climatic condition.
Post identification of activity pools, the resources for different activity pools are identified
including labor cost. Resource costs are directly allocated to the product while labor and
fuel costs are allocated to the respective activities on the basis of labor and machine
hours respectively. Implementation of ABC system is influenced by the level of
communication between developers of the costing model and the operators. Although
the system needs IT support, as the same was absent in case of sample farm, gap
between expected and arrived results are found. (Lu, Sridharan, & Tse, 2016)
Critical analysis- Principle
Product costing is the system to evaluate the product or service manufactured for sale.
Practice of product costing is mainly evolved to derive proper price- product mix of any
business. To make the practice more systematic, the traditional costing system is
gradually replaced by more scientific costing method named Activity-based Costing
system. The drawback of earlier system was improper allocation of overhead including
labor. The same is being replaced through ABC system with more scientific process of
allocation of overheads including labor cost apportionment. (B.B, 2012)
Critical analysis- practices
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Practices of costing system are being discussed here in perspective of China and
Australia. We have considered tow case studies for those countries.
It is observed that the Chinese power generation company had emerged with significant
development by implementing ABC from 2003. The company can control and identify
the domain of unnecessary costs. Implementation of IT had added value to this effort,
and the company proved its worth to perform in more professional way by identifying
variable costs.
The Australian agricultural farm has been chosen for a case of ABC implementation. It
is found that due to delicate nature of business, the system may not be able to deliver
the coveted result, which had been sought for. Moreover, different activity pools are not
easy for apportionment of overheads including labor and power. Due to non-availability
of IT infrastructure, the application was not as per expectation.
Conclusion
Management accounting is progressing through continuous research. One such
research is ABC for product costing. As the same is being followed by different
manufacturing and service corporate globally, the effectiveness of same can replace the
traditional costing with its scientific and logical approach to enable the management for
effective decision making.
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References:
B.B, T. (2012). Activity based Costing-An Emerging Foundation for Performance Management. Cost Technology .
Burrows, G. H. (2013). Gordon Shillinglaw: Economist, Consultant,and Management Accounting Scholar.
Accounting Horizons , 27 (3), 647-658.
Busa, J. (2011, October 04). Key Principles Of Effective Product Cost Management. Retrieved May 08, 2018, from
Manufacturing.net: https://www.manufacturing.net/article/2011/10/key-principles-effective-product-
cost-management
Kaplan, R. C. (1992, September). Activity-Based Systems: Measuring the Costs of Resource Usage. Accounting
Horizons .
Ken C. Snead, W. A.-A. (2005). Expectancy Theory as the Basis for Activity-Based Costing Systems
Implementation by Managers. Advances in Management Accounting , 14.
Liu, D. L., & Pan, P. F. (2003). Activity based Coting in China: A case study of Xu Ji Electric Co Ltd. Chartered
Institute of Management Accountant , 7 (13), 2,9.
Lu, C., Sridharan, V., & Tse, M. S. (2016). Implementation of the activity-based costing model for a farm: AN
Australian Case. JOURNAL OF APPLIED MANAGEMENT ACCOUNTING RESEARCH , 14 (2).
T.J.BrignallL.Fitzgerald R., J. R. (1991). Product costing in service organizations. Management Accounting
Research , 2 (4), 227-248.
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