Tiffany Bradford's Blog
Posted by Tiffany Bradford
When looking at how to determine costing for their business, many people do not look beyond the basic types (i.e. job-order, process, etc.) to other types of costing that may be beneficial to their business such as life-cycle costing. This may be because they do not see the benefit of costing that does not follow GAAP (meaning further down the life of the product, costs will have to be accounted for in a fashion that is acceptable by GAAP), or because this type of costing is not understood.
Life-cycle costing can be very beneficial for a business because it allows a firm to look at the total estimated costs and revenues of a project before the product goes into the production phase. By identifying costs down the chain, a product manager can look at items in the design phase that can be adjusted to minimize costs in the future. It can also help the product manager to determine if a product is really worthwhile before costs are committed.
Although future costs and revenues must be estimated, life-cycle costing can be a huge help to a product manager and development team, as well as a company’s finance team. More information on life-cycle costing can be found in this article on Life-Cycle Costing .
Posted by Tiffany Bradford
Determining the right costing system for your company can be difficult, if a person is not familiar with common costing systems. Some of the most popular types of costing systems are job-order costing, process costing, operational costing, and activity-based costing. These costing can be used in conjunction with other types of systems for assigning costs such as life-cycle costing and normal costing, or even in conjunction with each other in certain situations.
The type of costing system that is right for your business can be determined firstly by what you do or make. If you manufacture a homogeneous product (meaning you do not have differentiated products), then process costing would probably be most appropriate. If you manufacture products that come in differentiated batches, job-order costing would be more appropriate than process costing. Operational costing is a combination of these two types of costing that is used for products that are similar but produced in batches.
Activity based costing (ABC) is a type of costing that can be used in many different industries and focuses on identifying the activities that drive costs. ABC is usually used in conjunction with other types of costing because it generally does not conform to generally accepted accounting principles (GAAP) for reporting purposes.