Costing products is a matter of considerable significance to organizations. The requirement for accurate product costs ranges from cost identification for inventory valuation purposes, through to profitability analyses and strategic considerations. From the accounting standards perspective, a product’s cost comprises direct material, direct labour, and a “fair share” of factory overhead. Therefore, many downstream and upstream costs are excluded from the accounting standard approach. Additionally, as environmental considerations loom larger for manufacturing firms, environmental material and process costs are increasingly seen as requiring greater identification and consideration in product costing. Product disposal costs have also become a crucial issue for organizations in various circumstances. Suggestions have been made that the accounting standard approach to product cost must be expanded to enable firms to more readily address profitability and strategic matters.
Required: Examine the literature to identify the different perspectives on how a product’s cost may be formulated. Assess the strengths and weaknesses of the a variety of approaches to product costing that have been proposed, and assess that might be useful in ensuring that management accounting fulfils a more strategic role in manufacturing organizations.