Question

You are a Management Accounting Intern, at XYZ Tools Private Limited, a newly set-up, small manufacturer of custom designed and developed precision tools, for large machine shops. Being in the jobbing business, the company bids for jobs and executes them. Currently it captures costs by department and accounts for stores and raw material inventories.

Your role is to suggest improvements to the Cost Accounting system. You are about to make a recommendation to introduce a Product Costing System. When you sound out the Financial Controller, he says, “We have just one Accountant and I think introducing a product costing system is a complete waste of time”

Write a short justification, identifying four reasons for your recommendation.

Answer 1

Through a present instance, the firm is engaged in such a business in which it produces numerous different saws and equipment, in which the availability of products included would be very high so that it will not be reasonable to adopt the departmental costing method. As per the recommendation made by a new intern, the aforementioned product-based product will have additional features,

 

1) Product wise benefits can be ascertained easily.

 

2) Items having lower profits or losses may be discarded and items with increased margins may well be maintained;

 

3) Precision on the prices and revenues of the product should be developed such that prices can be minimized in order to increase the profit;

 

4) Assists with the decision-making process.

 

That is why it would be evident for the company to adopt product costing and assign the costing process to other employees.

Through a present instance, the firm is engaged in such a business in which it produces numerous different saws and equipment