Question

Why is product costing system necessary for a manufacturing company?

Answer 1

To understand in better way why product costing is necessary, first we should check and know what is product costing. Product costing is a method of costing wherein overall product cost is calculated and divided by number of units produced. Herein three are main factors taken into account to calculate Product costing:

1. Direct Material: Under Direct Material cost of raw material and its transportation cost is considered under product costing which is related to finished product.

2. Direct Labor Cost: Under this cost of employee or labor considered who are directly contributing in manufacturing of the product.

3. Overhead: Overhead includes all other direct costs other than material & labor. This can be indirect material, indirect labor and factory related costs. Most of these falls under either fixed cost or variable cost.

So, definitely every Manufacturer would like to know how much costs to him to produce their product. If Manufacture is having this knowledge, he can control expenses, account for future production needs, set appropriate price on product he produces, improve profit margin and isolate inefficiencies. So Product costing helps manufacturer to to know about costs incurred in production of product. Through the help of Product costing manufacturer can respond in better way to change in the market. Therefore product costing is very useful for manufacturing company and necessary to help manufacturer.