- July 3, 2020
Costing methods facilitate better managerial pricing decisions. They enable the management as well as other parties with a stake in making pricing decisions to value various items. It is not possible for the management to come up with the selling price for a specific commodity if they are not certain on the cost of that particular commodity. Beyond being useful in setting normal prices, the application of costing methods is also useful in determining whether certain special orders that are placed at lower prices should be taken or not (Kaplan & Atkinson, 2015). In as far as the pricing aspect is concerned, applying costing methods enable an organization’s management team to determine the combination of materials that ensures reasonable profit.
The application of costing methods facilitates making of the “sell or process further” decisions. It is through costing that a company can perfectly decide on the better decision between selling an intermediate product and processing it further. The costing method technique known as the relevant cost analysis method is a key player in making decisions of this caliber. Ideally, one (individual or firm) cannot purport to seriously decide on whether to sell or process further if they are not well aware of the costs incurred and profits gained in each case.
Costing methods form an important part of organization’s performance assessment. This is especially so for organizations that rate performance based on profits. For profits to be determined, the selling price, as well as the cost of production, must be clearly known. Costing methods enables the management to come up with the cost of production (Ellul et al., 2015). As such, rating the organization’s performance becomes easier. After rating the organization’s performance, the management may then proceed to make decisions on how the cost of production can be reduced in an attempt to increase the organization’s profitability.
Ellul, A., Jotikasthira, C., Lundblad, C. T., & Wang, Y. (2015).Is historical cost accounting a panacea? Market stress, incentivedistortions, and gains trading. The Journal of Finance, 70(6),2489-2538.
Kaplan, R. S., & Atkinson, A. A. (2015). Advanced managementaccounting. PHI Learning.