Relevant Costs – Meaning and Pitfalls
Relevant costs are those expected future costs that vary under various alternatives. These are the costs that are affected due to decision-making. Non-recognition of relevant costs can also lead to wrong decisions. For example, in whether to retain or replace an old machine, the realisable value and dismantling cost of the old machine are relevant […]
What are the Flaws in Traditional Costing System
A traditional costing system is an accounting approach used to assess the cost of producing products in order to generate a profit. The traditional allocation method assigns manufacturing overhead expenses based on a single cost driver, such as direct labour hours or machine hours. While nonmanufacturing costs are not regarded as production costs and are […]
Target Costing and Lifecycle Costing Explained
Target Costing and Lifecycle Costing are two important tools that can be used to manage and control costs throughout the product development process. Target costing is a tool that can be used to set a target cost for a product or project. This target cost is then used as a cost management and control baseline. […]
Method of Absorbing Overhead to Various Products or Jobs
Overhead Absorption A method of overhead absorption in cost accounting is a method of allocating expenses and gains to cost centres within a business. Benefits of Overhead Absorption Overhead absorption is useful for accounting purposes because it allows managers to assign a dollar value to the cost of services or products provided by each department […]
What are the Objectives of Target Costing?
Target Costing is a strategic pricing technique used by businesses in which the desired selling price of a product is set, and then the costs associated with making that product are reduced to meet that target selling price. Target costing is based on the idea that, as opposed to the conventional method of setting prices […]
Differences Between Traditional Costing and Target Costing
Many companies have difficulty understanding how traditional costing and target costing differ. These terms have their own specific meanings and purposes. Traditional costing and target costing have some differences. This is so because traditional costing is a methodology that aims to collect information about the cost and use that information to estimate the cost of […]
Meaning and definition of target costing
The strategic cost management tool “target costing” incorporates customer-centric pricing principles instead of traditional firm-oriented pricing. A target cost is a basis for establishing and controlling individual costs. The objective of target costs is to provide incentives to lower costs and increase the quantity of output in the same unit of time. CIMA defines target […]
What are the Different Types of Cost Audit?
A cost audit is an independent examination of an organization’s cost accounting records and procedures. It is used to ensure that the organization is following sound cost accounting principles and practices. Cost audit can also be described as “the verification of cost records and accounts and a check on the adherence to the prescribed cost […]
What is the Importance of Overhead Costs
Overhead costs are expenses incurred during the production of a product or the operation of a department but cannot be directly attributed to the product or department. Unlike direct costs, which can be readily traced to specific products or services, overheads represent the indirect expenses that underpin the overall functioning of an organization. While they […]
How to Calculate Accounting Rate of Return [With Example]
When a company makes an investment it evaluates the financial feasibility of the investment. This process is called investment appraisal. Investment appraisal is a critical stage of investment because it allows the company to invest funds in the most optimal options. The investment appraisal approach is a way of appraising financial assets following their anticipated […]