11-05-2003, 08:48 PM
Friends!!!
the question is elementary but important. a company is going thru the process of reviewing their cost structures and accordingly pricing policies.
they have around 10 product lines. the problem is that they are not using any costing method. the sale prices have been traditionally set based on experience and what the market will pay for the product. this has been paying as company has been profitable but definitely there is a need to identify problem products. recently they have started a sort of marginal costing analysis to achieve target margins. however these margin levels are arbitrary.
due to this reason they cannot do aggressive pricing nor do they know what product is doing bad with respect to the recovery of fixed costs.
As far as absorption costing is concerned, I understand that only indirect manufacturing costs are part of the product cost. Are their instance where administration costs can be apportioned to products?
what I understand is that these may be the logical steps
1. budgeting sales
2. budgeting expenses
3. budgeting man-hours (production)
4. calculate budgeted rates based on machine-hour/man-hour
5. apportion indirect manufacturing cost via 4
6. VC + AFC(apportioned fixed costs)=TC
7. Now if we need to calculate breakeven then FC/cont. margin
However cont. margin can only be set keeping in mind shareholder return/ industry profitability-margins / company's fixed costs/ market factors.
Also when normally should the FOH applied be closed int FOH control? at period end/month end/ quarter end... should the variance between actual and applied be shown as a separate account as otherwise closing it into COGM will take us back to square 1 i.e. actual costs.
The company has not been using any sort of responsibility accounting so this is all from scratch for them.
I suppose both marginal and absorption costing have roles to play in putting in place a product costing system and setting sales prices.
Comments are welcome. Thanx
the question is elementary but important. a company is going thru the process of reviewing their cost structures and accordingly pricing policies.
they have around 10 product lines. the problem is that they are not using any costing method. the sale prices have been traditionally set based on experience and what the market will pay for the product. this has been paying as company has been profitable but definitely there is a need to identify problem products. recently they have started a sort of marginal costing analysis to achieve target margins. however these margin levels are arbitrary.
due to this reason they cannot do aggressive pricing nor do they know what product is doing bad with respect to the recovery of fixed costs.
As far as absorption costing is concerned, I understand that only indirect manufacturing costs are part of the product cost. Are their instance where administration costs can be apportioned to products?
what I understand is that these may be the logical steps
1. budgeting sales
2. budgeting expenses
3. budgeting man-hours (production)
4. calculate budgeted rates based on machine-hour/man-hour
5. apportion indirect manufacturing cost via 4
6. VC + AFC(apportioned fixed costs)=TC
7. Now if we need to calculate breakeven then FC/cont. margin
However cont. margin can only be set keeping in mind shareholder return/ industry profitability-margins / company's fixed costs/ market factors.
Also when normally should the FOH applied be closed int FOH control? at period end/month end/ quarter end... should the variance between actual and applied be shown as a separate account as otherwise closing it into COGM will take us back to square 1 i.e. actual costs.
The company has not been using any sort of responsibility accounting so this is all from scratch for them.
I suppose both marginal and absorption costing have roles to play in putting in place a product costing system and setting sales prices.
Comments are welcome. Thanx
