Answer to Question #246384 in Economics for muskan

Question

Mr. Sharma, founder of Pioma Plastics desires to increase the profit of the business in the coming year. He calls for a meeting with the managerial-level personnel and explains them that the selling price of their product is based on the prevailing market prices of their competitors. He seeks their advice on whether they should work backward on optimizing their costs by determining a standard cost for each of the components. Explain the process of standard costing to the founder as one of the managerial-level personnel. Would following standard costing help the founder in increasing the profit of the business?

Answer 1

Costing is the determination of the costs per unit of production. For example, a company is engaged in the production of doors. In this case, the cost of manufacturing one door is calculated. The cost price includes costs in the following areas:

Transportation of products.

Cost of goods.

Delivery of raw materials or products.

Duty, VAT, and customs payments.

Material, raw materials.

The cost price includes many parameters. Costing allows you to determine the costs for each area. In the future, you can analyze the rationality of this spending and then reduce them. The manager is looking for the most effective methods to reduce costs.

The following types of costing can be distinguished:

Normative. When determining the cost price, the rates of consumption of raw materials, valid at the beginning of the month, are taken into account. It must be said that the real rates (which are used in the calculations) and the planned rates may differ from each other. For this reason, the values ​​of the target and planned costs will also be different.

Planned. The cost of production in this case will be average. It is set for a specific planning period. When calculating, you need to take into account the average cost standards. If the company executes one-off orders, an estimate is generated. There is also an accounting calculation that is needed to determine the cost of the service. It does not include cost norms.

Reporting. Determined at the end of the reporting period. When forming a reporting cost estimate, accounting data will be required: actual costs, production costs, the quantity of goods manufactured. This form provides the ability to track the execution of the plan to reduce the cost of production. The accounting estimate is needed to establish the dynamics of a decrease or increase in the cost price. It allows you to find the real cost of the product, to determine the difference between the actual and planned costs.