A cost accounting system should provide cost figures that will enable management to make decisions such as the following for each type of goods manufactured:
- How profitable is the product at present prices?
- Can it be profitably produced to sell at a different price?
- At what price shall it be sold?
- Should its production level be expanded or reduced?
- What can be done to control costs that are out of line?
If only a few kinds of products are made and the manufacturing processes are always the same, these decisions can be made on the basis of average per unit cost figures computed each month. Either of the two methods can be used to compute the average cost:
- Divide the total manufacturing cost by the number of product units produced.
- Compute the unit costs of the individual processes and total them.
In both cases, in figuring the number of units produced, changes in the inventory in process must be taken into consideration.
Suppose, on the other hand, that many different types of products are made and that selling price agreements are based on recorded costs. This is likely to be the case where a jobbing plant produces goods for many different customers to the individual customer’s specifications, or for a single customer whose specifications change often.
In such cases, the cost accounting system must be set up if you did not outsource accounting services so that product costs can be determined more directly. These systems are referred to as job cost systems or production order cost systems. If each product unit requires a large dollar out-lay, costs are assigned directly to each unit. For less costly units, costs may be assigned to groups or batches of like items and unit costs computed as an average for each group.