Costing concepts as it relates to SAC
In order for the SAC Company to be successful, the most significant assets should be human resources and its clients. In addition, to function in a viable competitive market SAC should practice simple standard cost system. SAC team members should try to find an alternative cost system that is most beneficial to SAC. Following are some notable costing systems that might relate to SAC:
This type of costing refers to all finished goods costs that are absorbed by the unit i.e. it absorbs all the costs.
- Full costing
Full cost accounting implies the practice of compilation and presentation all of the costs that are related to the production of goods or commodities.
Accordingly, full costing costs in the unit produced comprised of various costs. These are as below:
- Direct materials costs
- Direct labor costs
- Fixed & variable costs
In accordance various types of the costs can fluctuate. As regards, full costing the expression has been utilized as true cost accounting. Direct costs and indirect cost would be allotted in full costing.
The costs incurred by SAC Company should be incorporated the full cost method. These costs are related to overheads and organizational expenses.
Advantages of Full Cost Accounting
- Managers can realize more data
- Make better decisions
- The product price is more precise and accurate.
As well, the full costing method is used in financial and income tax reporting. This method effectively helps the management to assess internal control in various departments related to production and sales. Moreover, this system helps in providing a better view and knowledge of the products’ actual cost or service in the company.
Full cost accounting disadvantages
- More time-consuming
- Needs more human resources to deal with large workloads
- Managers can question important cost decisions
- The costs are hard to manage to for monitoring, planning, and controlling purposes.
These costs are expenses that fluctuate in size of the business process, which is the total of the subsidiary costs in all units that have been produced.
Activity Based Costing (ABC)
ABC denotes to internal operating problem and relates to traditional cost management system. This costing method is not a additional for the traditional accounting, which utilizes the primary source documents provided from the typical job costing systems. It is argued that ABC can be useful in measuring the resources used by products. This cause and effect correlation offers a better way of finding out pertinent costs. As well, it is claimed by Drury (2001) that ABC can be utilized for various management applications.
Overall, the management accounting studies have offered primarily four types of ABC studies namely consulting, basic, critical and contingency research (Otley, 1980; Young & Selto, 1991; Lukka & Granlund, 2002).
There are many companies that apply the ABC when there are chances of overhead cost for a mistake is high, and there is not much competition. The ABC is considered as the most accurate cost management system.
In spite of its high popularity in the accounting world, the published studies on ABC implementation show that there is a rather a low rate of its implementation (Clarke, 1992, 1997; Pohlen & Londe, 1998; Sartorius et al., 2007).
The cost drivers in the ABC
In ABC system business units help the company to gather their resource costs against the episode sequence time. All revenue reports offer the managers various alternatives on the profitability of goods and services.
Moreover, the ABC system is quite helpful to middle management for line item reporting and to undertake more responsibility to acquire data in detail and notify to the organization.
The ABC accounting method is related to all pertinent revenues and costs for value adding to the activities carried out in the supply chain method. This method is applied to allocate the indirect costs between products and goods.
ABC is seen by the accounting business as a powerful accounting system for the future and is espoused by many large companies.