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For financial specialist in the financial reports, all cost incurred in product manufacturing is called product costs (Easton, Halsey, McAnally, Hartgraves, Morse, 2013). Product costs are carried in the accounts as an asset (inventory) until product is sold, at which time they are recognized as an expense (cost of goods sold) (Easton, Halsey, McAnally, Hartgraves, Morse, 2013). The product cost is calculated using the cost of raw materials, production employee salaries and wages and all other manufacturing costs incurred in the manufacturing process to covert the raw material into finish product (Easton, Halsey, McAnally, Hartgraves, Morse, 2013).
There are many manufacturing process; some can increase costs and other can reduce costs. With the new manufacturing techniques some manufacturing techniques become to be more complex, for example, biotechnology is one of the most complicated manufacturing processes and fragile. The pharmaceutical process is simpler and less fragile so the costing process is cheaper. In technology for example day by day with the new upgrades the technology manufacturing process it could more complicated and expensive but the market demand the manufacturing cost decreases.
Although research & development (R&D), marketing, and customer service is important and is also a critical part of the business these costs are not included as a part of the manufacturing process and are not included into the product cost for the financial reporting process (Easton, Halsey, McAnally, Hartgraves, Morse, 2013).
According with the text book the job costing systems works well when product are made one at time or in batches of identical item; this statement is applicable to all type of manufacturing products (Easton, Halsey, McAnally, Hartgraves, Morse, 2013). In manufacturing processes where the products are produced in a continuous manufacturing environment and where the production process does not have beginning and ending such as fuel like gasoline or diesel the companies usually use a process costing system (Easton, Halsey, McAnally, Hartgraves, Morse, 2013). In the job costing, the unit cost is the total cost of the “job” divided by the units produced and the costs are accumulated for each job on the job cost sheet (Easton, Halsey, McAnally, Hartgraves, Morse, 2013).
Job costing is widely used in service oriented organizations, such us consulting firm, legal firms, CPA firms, audit companies, IT services firm, etc. These companies use job costing to identify the costs associated with an individual client order and calculated the profitability of this job for the organizations. Such companies usually include all directly identifiable materials or costs related to the order, such us hotel bills for consultants, travel expenses related to the client assignments, use of office supplies or offices rented specifically for this order, fees paid to experts used for research, etc. In addition, there are costs that are allocated to the job based on the pre-determined internal rate, such us the cost of hours spent on the job by senior partners, managers and junior staff. The cost of an hour is calculated differently by each company and therefore varies from one company to another. For example, in a large international consulting company that has a lot of departments that focus on research, training, marketing, etc. the cost of a partner hour will be much higher than in a small boutique company that has just one office where every partner in primarily engaged in providing services to clients. This discrepancy allows small company to bid for client orders that are not profitable for large companies.
Product costing is used primarily in manufacturing environments, where a large quantity of the same or similar units are produced and the company needs to identify the consumption of direct raw materials and production labor per units manufactured; as well as the absorption of manufacturing overhead costs into these units. For example, in the case of production of school backpacks, the company needs to know the consumption of fabric, chemicals, and accessories per each backpack. It needs to identify the number of hours spent by the production personnel to assemble one backpack, and the portion of other production costs that could be allocated – energy, printing services, supervisory hours, etc. A manufacturing company could gain significant competitive advantage from scale, since its production overhead will be spread over a much larger number of units. In addition, large companies can outsource their labor to cheaper locations, and they also can negotiate lower rates for raw materials. Product costing allows managers to identify areas of overspending and intervene with appropriate decisions.