Determine cost of Product

and Services with various

costing system
Prepared by:
Cherwin m Bentulan
May Angelica Olivera
 Product cost refers to the costs incurred to create a
product. These costs include direct labor, direct materials,
consumable production supplies, and factory overhead. Product
cost can also be considered the cost of the labor required to
deliver a service to a customer. In the latter case, product cost
should include all costs related to a service, such as compensation,
payroll taxes, and employee benefits.
 The cost of a product on a unit basis is typically derived by
compiling the costs associated with a batch of units that were
produced as a group, and dividing by the number of units
manufactured. The calculation is:
(Total direct labor + Total direct materials + Consumable supplies + Total allocated
overhead) ÷ Total number of units
= Product unit cost 
 Product cost can be recorded as an inventory asset if the product has not
yet been sold. It is charged to the cost of goods sold as soon as the product is
sold, and appears as an expense on the income statement.

Product cost appears in the financial statements, since it includes the

manufacturing overhead that is required by both GAAP and IFRS. However,
managers may modify product cost to strip out the overhead component when
making short-term production and sale-price decisions. Managers may also
prefer to focus on the impact of a product on a bottleneck operation, which
means that their main focus is on the direct materials cost of a product and the
time it spends in the bottleneck operation
 A costing system is designed to monitor the costs incurred by a business. The
system is comprised of a set of forms, processes, controls, and reports that are
designed to aggregate and report to management about revenues, costs, and 
profitability. The areas reported upon can be any part of a company, including;
• Customers
• Departments
• Facilities
• Processes
• Products and services
• Research and development
• Sales regions
 The information issued by a costing system is used by
management for a variety of purposes, including:

• Fine-tuning operations to generate higher profitability

• Deciding where to cut costs in the event of a business downturn
• Matching actual costs incurred against budgeted cost levels for
control purposes

• Creating strategic and tactical plans for future operations

 The reports of a costing system are intended for internal use, and so are not subject
to the reporting requirements of any of the accounting frameworks, such as GAAP or 
IFRS. Instead, management can decide what types of information it prefers to see,
which information to ignore, and how the results are to be formatted and distributed for
its consumption. Typical reports created by a costing system include:

• Budget-versus-actual reports for costs incurred

• Profitability reports for customers, sales regions, stores, products, and/or product lines
• Expense trend reports that show expenses incurred by month for many consecutive
months
 These reports may be accompanied by additional information assembled by the
accounting department, which provide details regarding how certain costs were incurred
and who authorized them.

There are two main types of costing systems. A business can accumulate information
based on either one of these systems, or adopt a hybrid approach that mixes and
matches systems to best meet its needs. The primary costing systems are:

1. Job costing system. Materials, labor, and overhead costs are compiled for an

individual unit or job. This approach works best for unique products, such as custom-
designed machines or consulting projects. The cost accumulation process is highly
detailed and labor-intensive.
2. Process costing system. Materials, labor and overhead costs are
compiled in aggregate for an entire production process, and are
then allocated to individual production units. This approach works
well for large production runs of identical items, such as a
production run of 100,000 cell phones. The cost accumulation
process is highly efficient and portions of it can possibly be
automated.
 Another costing system option is activity based costing (ABC).
ABC was developed in response to concerns that overhead costs are
rarely allocated in an appropriate manner, and involves a finer
degree of differentiation in determining how overhead costs are
assigned to different cost pools, and then how the costs in those
pools are allocated to cost objects. An ABC system can be difficult
to set up and operate, and so works best when designed for very
specific cost allocation projects that have clearly defined boundaries
Thank you for Listening!!!!