Critical Evaluation Of The Product Costing Essay

Question:

Discuss about the Critical Evaluation Of The Product Costing And Pricing Practices Actually In Use In Modern Manufacturing Organizations The Asia Pacific Region.

Answer:

Introduction

The accounting practices that are adopted by various business concerns help them to have an effective control over their business transaction. The consistent application of such practices and accounting policies strengthens the financial information of a business undertaking (Ax & Greve, 2017). The focus of this essay is in the product costing systems and pricing practices that are used in the Asian Pacific region such as Australia, Japan, and China.

A number of real-life organizational scenarios have been included here so that the readers can get an idea about the actual application of such models by businesses and their impact on the respective concerns (Christ & Burritt, 2013). Different journal articles and publications have been referred to understand the costing practices followed by manufacturing concerns in the particular region so that vital aspects relating to this accounting practice can be critically evaluated.

Product costing systems in Asia Pacific Region

The different accounting techniques and theories have been present for a long time and the same is used by different business organizations irrespective of the industry in which they function. When business undertakings adopt relevant accounting tools and techniques, they are supposed to do so very carefully since it has a vital bearing on their overall business performance (Cooper, Ezzamel & Qu, 2017).

Product costing techniques basically refer to the costs involved to develop or create a product. Various kinds of product costing systems exist, but it is vital for any business to adopt the appropriate costing model based on the specific business situation. The firms basically use the costing information to value their inventory for financial reporting objective (Dekker, 2016). The focus has been on nations like Australia, Japan, and China so that the product costing model used in the organizations in the Asia Pacific region can be evaluated. It is vital to observe the real-life impact of these accounting models on businesses and their operations.

Product costing model in Australian manufacturing firms

Due to a large number of technological changes in the organizational front in the past decade, the manufacturing environment has undergone a drastic change that allows manufacturers to shift from mass production of a few standardized produces to efficient production of small batches of customized commodities on a short notice. The journal article titled “Comparative analysis of Management Accounting Practices in Australia and Japan – An Empirical Investigation” by H. Wijewardena very correctly highlights the fact that the changing manufacturing setting has created the need for more refined models of product costing (Wijewardena & De Zoysa, 1999).

The new approaches like activity-based costing and target costing have been developed which help business concerns to have better control over their product costs. As per the article, the majority of the Australian companies use process costing followed by job order costing as the main product costing model. The business situation that an undertaking faces plays a vital role while selecting the technique of product costing (Fullerton, Kennedy & Widener, 2013). The process costing basically helps the Australian manufacturing concerns to trace and integrate its direct costs and allocate its indirect cost of the manufacturing process. Similarly, the job order costing model allows businesses to assign their manufacturing costs to the individual products or batches of commodities. This model is used by concerns that manufacture different kinds of products. Example - Clothing factories, etc.

Product costing model in Japanese manufacturing firms

Since the product costs play a significant role in an organizational setting, the Japanese manufacturing players gave high significance to this function. According to the journal paper by H. Wijewardena, the Japanese manufacturers mostly adopt the job order costing model and hybrid costing model to ascertain the costs involved while developing a commodity (Wijewardena & De Zoysa, 1999). The hybrid model is basically the combination of job order costing and process costing. The main reason for the increase in the use of hybrid costing model is the availability of new manufacturing technologies in the market and specific demands of the customers.

According to the journal article “Japanese Target Costing – A Historical Perspective” by Patrick Feil, the target costing model is still popular in the Japanese manufacturing environment (Feil, Yook & Kim, 2004). This environment-friendly costing model allows manufacturing concerns to ascertain a commodity’s entire lifecycle cost which would be adequate to strengthen its functional aspects. This model allows the easy split of the production cost into smaller units such as functional unit and components unit which allows the business to allocate the target costs to the different product areas based on customers’ expectations and needs (Tappura, et al., 2015). The combination of various techniques and models that are governed by the target costing philosophy allow Japanese manufacturing concerns to strengthen their business objective. The apt example is the target costing model adopted by Toyota Motor Corporation.

Product costing model in Chinese manufacturing firms

The use of appropriate product costing model allows business enterprises to ascertain a reasonably accurate estimate of the consumed resources for product creation. Since in the present business environment, concerns are producing a wide variety of commodities and products, the proper control over the product cost can have a significant impact on the profitability of the business concern.

The journal article titled “How much does it cost to make it? Product costing in a Chinese small manufacturing company” by Nan Tu and Danju Zhang highlights the project costing model used in Chinese manufacturing concerns (Tu & Zhang, 2010). It draws a difference between the traditional costing model and the activity-based costing model and ultimately illustrates the rationale behind coat allocation decisions by business undertakings.

In the past decades, Chinese manufacturing environment has expanded significantly and it has become one of the world’s major manufacturing bases. In order to seek better growth opportunities, the operating businesses are strengthening their business models by developing their own products (Wagenhofer, 2016). Due to the existing complexities in the product development process, the traditional costing models are being replaced by new product costing models. Nan Tu rightly highlights the significance of new and improved product costing models since they help business concerns to have a firm grip on their costs and finances.

The journal article “Activity-based costing in China – a case study of Xu Ji Electric Co. Ltd” by Dr Lana Yan Jun Liu specifically focuses on the ABC model i.e. activity-based costing model since it acts as an effective tool to capture the direct costs as well as the variable overheads that have been lacking in the traditional accounting model (Liu & Pan, 2011). This paper particularly focuses on the electronic concern and highlights the fact that the activity-based costing acts as a catalyst to strengthen the manufacturing business operations.

The key features of the ABC model include the “top-down” process to develop new and innovative business ideas. This approach allows the concern to shift quickly from copying western business ideas to developing their own business strategies (Otley, 2016).

Impact of the Product costing model

The product costing models that have been adopted by the manufacturing concerns in Australia, China and Japan have a significant impact on their overall business strategic model. The journal papers that have been referred in this essay show that different kinds of product costing techniques are adopted by business concerns based on the business environment, market situation, growth opportunity etc. Different manufacturing concerns in the region adopt different management accounting techniques to strengthen their strategic model of the business (Christ & Burritt, 2013).

Effective and appropriate application of product costing models allows business concerns in a number of ways including it strengthens the decision-making process, helps control the cost model of the business, enhances strategic model, aligns the business process. They help the manufacturing concerns to save millions of dollars through the thorough analysis of the business inventory.

The accurate calculation of product costs is significant for all concerns especially the ones that are involved in manufacturing goods or products. The entire budget process of the concern gets affected by the product costing model (Wagenhofer, 2016).

The financial statements that highlight the financial position of the business concern undergo changes based on the selected product cost model. Similarly, the standing of the business inventory gets altered based on the adopted product costing model.

Conclusion

The accounting policies and procedures that are adopted by business concerns have a significant impact on the overall profitability of the business. This essay basically focuses on the manufacturing companies that function in the Asia Pacific region. The nations’ whose product costing model has been assessed here are from Australia, Japan, and China.

The different product costing models that are popular in the organizations are job order costing, hybrid costing, target costing, and activity-based costing. The product costing model that is selected by the business concerns depends on their specific business situation and the industry environment.

The product costing model that is ultimately chosen by the manufacturing concerns has a significant impact on the business operations, inventory management, profitability and business performance. The application of accurate and consistent management accounting policies can give concerns a competitive edge in the industry and help them to exploit the growth opportunities.

Different journal articles and published papers have been used in this essay so that the product costing concept can be critically evaluated in the real-life scenario and its impact on the business can be observed. These articles support the theoretical knowledge and illustrate its actual performance in the organization scene.

References

Ax, C., & Greve, J. (2017). Adoption of management accounting innovations: Organizational culture compatibility and perceived outcomes. Management Accounting Research, 34, 59-74.

Christ, K. L., & Burritt, R. L. (2013). Environmental management accounting: the significance of contingent variables for adoption. Journal of Cleaner Production, 41, 163-173.

Cooper, D. J., Ezzamel, M., & Qu, S. Q. (2017). Popularizing a management accounting idea: The case of the balanced scorecard. Contemporary Accounting Research.

Dekker, H. C. (2016). On the boundaries between intrafirm and interfirm management accounting research. Management Accounting Research, 31, 86-99.

Fullerton, R. R., Kennedy, F. A., & Widener, S. K. (2013). Management accounting and control practices in a lean manufacturing environment. Accounting, Organizations and Society, 38(1), 50-71.

Feil, P., Yook, K. H., & Kim, I. W. (2004). Japanese target costing: a historical perspective. International Journal, 11.

Liu, L. Y. J., & Pan, F. (2011). Activity based costing in China: a case study of Xu Ji Electric Co. Ltd. Chartered Institute of Management Accounting, 7(13), 1.

Otley, D. (2016). The contingency theory of management accounting and control: 1980–2014. Management accounting research, 31, 45-62.

Tu, N., & Zhang, D. (2010, October). How much does it cost to make it? Product costing in a Chinese small manufacturing company. In Supply Chain Management and Information Systems (SCMIS), 2010 8th International Conference on (pp. 1-9). IEEE.

Tappura, S., Siev?nen, M., Heikkil?, J., Jussila, A., & Nenonen, N. (2015). A management accounting perspective on safety. Safety science, 71, 151-159.

Wijewardena, H., & De Zoysa, A. (1999). A comparative analysis of management accounting practices in Australia and Japan: an empirical investigation. The International Journal of Accounting, 34(1), 49-70.

Wagenhofer, A. (2016). Exploiting regulatory changes for research in management accounting. Management Accounting Research, 31, 112-117.

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