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In consideration with the overhead absorption if different types of product is produced.
'' In consideration with the overhead absorption if different types of product is produced.''
ABC or Activity Base Costing is the best in calculation production cost, it aims to identify Value Adding Activities to enhance them, and Non Value Adding activities to eleminate or reduce them.Value adding activities are vital to the product, usually related to the core business.ABC need athorough study and analysis of all the activities in the business, which is expensive and time consuming process, that is considered a drawback of the ABC, in the other hand ABC is reliable and accurate in allocation of cost to the product .
Absorption costing '' allocation of all fixed cost to the product - no differntiation between variable and fixed cost'' may cause a negative results , high cost means high selling price that may lead to low sales volume.
There's a study called "Cost Of Service" which made for determining cost of product or service, but that's a very long and complicated study to discuss here. Why?
Because "Cost Of Service study" differs significantly between different product or services. For instance: In the Water sector, we use "Cash needs" approach (which is one of4 different approaches) to determine what's called "Revenue Requirements" >> which is one of4 long steps to reach the real product cost for each customer in each category and sub-category.
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Activity Based Costing
Production costs is a byproduct for the work order tracking systems, whether automatic or manual.
A work order should contain all raw material and components used to produce the product(s) quantities produced in the work order. It also contain the information about the manhours and machine hours and consumables consumed to complete each process within the work order routing.
The direct production cost is the sum of the costs of these components. Most Production Control systems accompanied with Bills of Material and Routing systems provide standard and actual costs for each product.
Indirect produtction costs are allocated after the end of the period and Costing systems allows for doing that using more than one method.
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