Question

Why is a production cost report an important tool for managers in manufacturing organizations? What can result if managers don't have accurate information on the product cost report?

Answer 1

Product costing is the process of an assignment of costs to inventory and production based on the expenses that incurred into producing or buying an inventory. There are several costing methods available that can be chosen by businesses based on simplicity, accuracy and other factors. These processes are very important for manufacturers.

Let discuss why a production cost report an important tool for managers in manufacturing organizations;

• Product costing report ensure business to trace it expenses through out from product costs and to the correct inventory values effectively. It can supplement the accuracy of other processes, such as variable costing, helps in assigning product units variable costs which associated with their manufacturing and separate fixed costs to other expense accounts. This resultantly enforce the matching principle and attachment of costs to the value created throughout the business.
• Product costing report ensure an effective and efficient project tracking because when an organisation assigns costs to its various stages of a project and keeps a regular focus on the budgets of that project to see whether the costs incurred are matching to the values expected or not. So, we know coting is a vital part of tracking a project, and also without proper costing analysis it can be challenging to analyse cash flows as well as to identify whether a project will succeed or not. So, a production cost reports an important tool.
• A production cost report not only helps in tracking project efficiently but it also plays major role in decision making. While the business making decisions it usually involve return on investment and the probable value of profit that a business can generate from a particular project. Product costing can be evolved as a foundation on which these decisions could be made.
• A production cost report can also help in the Development of other new projects. When an organisation is planning to manufacture a new line of product or either to recreate an old product with new features, then the product costing report could play a vital role by becoming a valuable resource to compare the past experiences.

Based on the importance defined above that a production cost report has for the managers in manufacturing organizations, could substantiate the fact that if inaccurate product cost report available to the managers it could result in disastrous consequences, as discussed below;

• It will not only fail the project on which an organisation is currently working but it will also lead to impact the future of other new project negatively as these reports could be used in planning of new projects.
• It will also lead poor decision making because if the figures and/or values define in product cost report is inaccurate then it will misguide the management to discontinue with the project or could also result in unnecessary expansion or reduction of process. So, the accuracy of a product cost report is of utmost need.

Hope this clarifies!