Product Costing

In our competitive world profitability, growth and survival are the key issues confronting any business organization. No enterprise can survive and grow unless it is profitable in the long run. Profit is the result of two forces- revenue and cost.Revenue is the product of selling price and volume of output i.e., selling price multiplied by output it can sell. Selling price is influenced by market forces and is generally beyond the control of management. Similarly how much the output of a firm can be sold is again dependent upon market structure, price structure,marketing mix of the enterprise and host of other factors like government policies
concerning tariffs and taxes etc. Moreover the information about demand conditions is bound to be scarce and difficult to obtain, the cost information is usually plentiful which should be made use of by the managers. The firm pursuing the goal of profit maximization should endeavor to reduce per unit cost of production. The reduction in cost can be accomplished when cost per unit is ascertained. Therefore,knowing your production cost is critical. In present day economic scenario, accurate costing and pricing are key to success. Accurate costing avoids or minimizes distortions in product costing that result from arbitrary allocations of various costs.Managers want product costs for guiding their decisions regarding pricing and product strategies.

Managers also want product cost for the purpose of inventory valuation and income determination.The product is the smallest unit for which profitability is calculated.Product Costing It aids in arriving at profitability of the various business segments of an organization thus providing its total picture.

Product costing is the process of tracking and studying all the various costs that are incurred by the firm on its products or we can say what it costs to make the product. But before product cost is ascertained and estimated it is more relevant to define cost and other terms frequently used in costing. Cost has different meanings, differing among accounting, economics and engineering. The traditional accounting definition of cost is limited to the amount expended to acquire an asset. A more general concept equates cost with any sacrifice, past or future. In this context cost represents the resources that have been or must sacrificed to attain a particular objective. The concept of cost is multifaceted. The cost concepts shall be more clear if the following basic terms are understood properly.