operation costing

hybrid of job-order and process cost systems. Companies that manufacture goods that undergo some
similar and some dissimilar processes use this system. Operation costing accumulates total conversion
costs and determines a unit conversion cost for each operation. However, direct material costs are
charged specifically to products as in job-order systems.

Target costing

Method used in the analysis of product design that involves estimating a target cost, via a desired profit
and sales price, and then designing the product/service to meet that cost. This method precedes Kaizen
costing. The Japanese concept of Kaizen is relevant to target costing. A policy of seeking continuous
improvement in all phases of company activities facilitates cost reduction, often through numerous minor
changes.

A lengthy but complete definition is "Target Costing is a disciplined process for determining and achieving
a full-stream cost at which a proposed product with specified functionality, performance, and quality must
be produced in order to generate the desired profitability at the product’s anticipated selling price over a
specified period of time in the future." [3]

This definition encompasses the principal concepts: products should be based on an accurate
assessment of the wants and needs of customers in different market segments, and cost targets should
be what result after a sustainable profit margin is subtracted from what customers are willing to pay at the
time of product introduction and afterwards. These concepts are supported by the four basic steps of
Target Costing: (1) Define the Product (2) Set the Price and Cost Targets (3) Achieve the Targets (4)
Maintain Competitive Costs.

activity based costing

Costing system that identifies the various activities performed in a firm and uses multiple cost drivers
(volume and nonvolume based cost drivers) to assign overhead costs (or indirect costs) to products. ABC
recognizes the causal relationship of cost drivers with activities.

Activity-based costing (ABC) is an accounting method that allows businesses to gather data about their
operating costs. Costs are assigned to specific activities—such as planning, engineering, or
manufacturing—and then the activities are associated with different products or services. In this way, the
ABC method enables a business to decide which products, services, and resources are increasing their
profitability, and which are contributing to losses. Managers are then able to generate data to create a
better budget and gain a greater overall understanding of the expenses that are required to keep the
company running smoothly. Generally, activity-based costing is most effective when used over a long
period of time, as opposed to shorter-term solutions such as the theory of constraints (TOC).

Relevant Cost

Expected future costs that differ from the alternatives being considered. Sunk Costs are not relevant to
the decision at hand, because they are historical costs. Incremental or differential costs are relevant
because they are the ones that differ from the alternatives. Since not all costs are of equal importance,
managers must identify those that are relevant to a decision. For example, in a decision on whether to
replace an existing business with a new one, the cost to be paid for the new venture is relevant. However,
the initial cost of the old business is not relevant because it is a sunk cost.
just in time

This practice became an increasingly important aspect of economic manufacture and distribution in the
closing decade of the 20th century. By automatically linking sales data gained from retail outlets and
checkout terminals with centralized corporate manufacturing and distribution systems ‘just in time’
obviated the need for manufacturer-retailers such as the Italian clothing company Benetton to hold large
quantities of stock in store (thus wasting valuable space). Such companies took full advantage of the
manufacturing possibilities afforded by Computer-Aided Manufacture (CAM) and, in the widespread drive
for increasing efficiency in a highly competive market place, this ‘just in time’ tailoring of production to
retail outlet allowed for economic small-scale production runs that were closely linked to changing and
sometimes volatile consumer demands.

Read more: http://www.answers.com/topic/just-in-time-code-lyoko-episode#ixzz1JCHxwW3C

Inventory management practices:

 Appraise adequacy of raw material levels.

 If prices of raw materials are expected to sharply increase, buy more now.
 Discard slow-moving items to reduce carrying costs and improve cash flow.
 Watch out for inventory buildup.
 Minimize inventory levels when cash flow and liquidity problems exist.
 Examine the quality of merchandise received.
 Monitor backorders, since a high backorder level indicates a reduced need for inventory.
 Evaluate internal inventory control.
 Minimize lead time in the acquisition, manufacturing, and distribution functions.
 Examine the degree of spoilage or obsolescence.
 Appraise high inventory risk items, such as technological, perishable, fashionable, flammable,
and specialized goods.

Backflush Costing

A product costing system generally used in a just-in-time inventory environment. Backflush costing delays
the costing process until the production of goods is completed. Costs are then “flushed” back at the end of
the production run and assigned to the goods. This eliminates the detailed tracking of costs throughout
the production process, which is a feature of traditional costing systems.

Product costing approach, used in a Just-In-Time (JIT) operating environment, in which costing is delayed
until goods are finished. Standard costs are then flushed backward through the system to assign costs to
products. The result is that detailed tracking of costs is eliminated. The system is best suited to
companies that maintain low inventories because costs then flow directly to cost of goods sold. Work-in-
process is usually eliminated, journal entries to inventory accounts may be delayed until the time of
product completion or even the time of sale, and standard costs are used to assign costs to units when
journal entries are made, that is, to flush costs backward to the points at which inventories remain.

What is service costing?

Service costing is that part of operation costing which is used in all organisation who provide services
instead of producing of goods. For calculating the price of each service, it is very necessary to collect all
the expenses relating to that services. We make a cost sheet in which we show all the cost relating to
specific service. These costs are calculated on the time basis. Following are the main organisations who
provide services

1. Bus, Trucks and Rail - Transport services

2. Hosting and Domain - IT Services

3. Electricity Companies - Electricity services

5. Gas and Petrol Companies - Gas and Petrol services

Service Costing Examples

1. Salary 2. Insurance 3. Road Tax

4. Licence Fees
5. Interest on Capital
6. Repairs
7. Depreciation
8. Petrol Expenses
9. IT Service Related Cost
{*All companies who provide IT services must have to pay the expenses relating to IT services. Main
examples are hosting and domain cost, cost of data server and other storage and power costs. }

Difference between absorption costing and variable costing with point?

Under variable costing only variable costs are included in unit product cost. All fixed manufacturing costs
are treated as period costs. Under absorption costing both variable and fixed manufacturing costs are
included in unit product cost.

VARIABLE COSTING VERSUS ABSORPTION COSTING

Absorption costing applies all manufacturing overhead to production costs while they flow through Work-
in-Process Inventory, Finished-Goods Inventory and expenses on the income statement while Variable
Costing only applies variable manufacturing overhead.

Fixed manufacturing overhead is expensed immediately as it is incurred under variable costing while it is
inventoried until the accounting period during which the manufactured goods are sold under absorption
costing.

variable costing

Method in which the costs to be inventoried include only the variable manufacturing costs. Fixed factory
overhead is treated as a period cost-it is deducted along with the selling and administrative expenses in
the period incurred. That is,

Direct materials $xx Direct labor xx Variable factory overhead xx Product cost $xx

Fixed factory overhead is treated as a period expense.

Joint Cost Allocation

A. Characteristics--a common manufacturing process simultaneously produces two

or more products from a common input

1. Joint Costs--joint costs are the costs of the common manufacturing

process

2. Joint Products--joint products are the products produced from a common

input and a common manufacturing process

a. By-products--by-products are joint products that are relatively

minor in quantity and/or value

3. Split-off Point--the split-off point is the stage of the common

manufacturing process where the joint products are separated

Differences Between Process Costing And Job Costing

Following are the main differences between process costing and job costing:

1. Applicability
Process costing is applied to ascertain the cost of standardized products produced in mass. So, naturally,
materials, labor and other facilities remain indifferent. Job costing is applied to ascertain the cost of a
specific order received. The quality and quantity of materials and labor and other facilities between jobs
vary.

2. Cost Collection
Process costing accumulates manufacturing costs for departments or processes. Job costing uses cost
sheet and accumulates manufacturing costs for each job or batch separately.

3. Time Period
Process costing has a time frame of certain months or years for which costs are accumulated. Job costing
has no time frame. It ends after the completion of a particular job so that costs are accumulated for each
job.

4. Unit Cost Ascertainment

Process costing divides total departmental process costs by the departmental process output to derive
the unit cost. Job costing obtains unit cost by dividing the total cost of the job by the job order units.