Product Costing Systems

Product costing systems plays a critical role in the manufacturing environment and is also a significant factor in service industries. A good costing should be flexible and reliable. It provides information for a variety of purposes and can be used to answer a variety of questions. In general, the cost accounting system is used to satisfy the needs for cost accumulation, cost measurement, and cost assignment. Cost accumulation refers to the recognition and recording of costs.

The cost accountant needs to develop source documents, which keep track of costs as they occur. A source document describes a transaction. Data from these source documents can then be recorded in a database. Well-designed source documents can supply information in a flexible manner. Cost measurement refers to classifying costs and consists of determining the amounts of direct materials, direct labor, and overhead. Two common methods of cost measurement in production are:

(1) Actual costing and

(2) Normal costing

An actual costing system uses actual costs for direct materials, direct labor, and overhead to determine unit cost. A normal costing system uses actual costs for direct materials and direct labor but measures overhead costs on a predetermined basis. Cost assignment refers to distributing costs to units of product manufactured or units of service delivered. There are two Product Cost systems used to assign costs to products or services: