Inventory Costing

Inventory is a comprehensive list of goods in stock. Inventories can also include raw materials and work-
in-process products. Inventories are important assets of the company, and their costs have a significant
impact on profit margins. Inventory costing determines the pricing approach for raw products and goods
in stock.

The most common inventory costing methods include:

First-in, First-out (FIFO)

Last-in, First-out (LIFO)

Weighted Average

Specific Identification

FIFO determines the price of inventories based on the date they were received or the date of
manufacture. Companies can use this method to determine the correlation between the cost of items in
stock and the costs associated with the sale of the products. FIFO ensures that the older items are
exhausted before, the newer ones.

LIFO ensures that the newest arrivals are used up before the oldest ones. Most organizations do not use
this method because it is discouraged by the International Financial Reporting Standards. It is not
suitable where the new and the old inventories mix.

Methods or Types of Costing

Basically, costing is divided into two methods. They are job costing and process costing. Even though,
two more costing methods are generally used by some manufacturing concerns. They are composite or
multiple costing and farm costing.
The basic principles underlying all these methods or types are the same. The principles are collecting
and analyzing the expenditure according to the elements of cost and determine the cost for various cost
centre and cost unit.

A. Job costing

The cost unit under this method is very small. Job costing system is used when there is a need to find
out the cost of a job or a specific order of finished goods. Finally, profit or loss of such job is also found
out. Printers, machine tool manufacturers, notebook manufacturer. painters. etc follow Job costing. Job
costing includes Batch Costing, Contract Costing and Departmental Costing.

1. Batch Costing

The cost of group of products is ascertained under this method. The reason is that the cost of single unit
or product is not able to find out. Hence a group of products are taken into account for calculation. The
group of products is having homogeneous character. Thus, hatch costing is used by engineering factories
producing components or spare parts. pharmaceutical industry. textile industry, toys and biscuits
manufacturing companies and the like.

2. Contract Costing

It is otherwise called Terminal Costing. Here, contract is the cost unit under this method of costing. The
completion of a contract requires more than one year. Even though, profit from such a contract is also
find out. Building, Road and Bridge contractors are following contract costing.

3. Departmental Costing

If the company is decided to ascertain the cost of the output of each department separately,
departmental costing is used. But, the application of departmental costing requires uniform
performance of all the departments. A departmental rate per unit of output i» fixed. If any job or
product or unit passing through such a department, the rate is added with passing product or unit.

B. Process Costing

Process costing is used whenever a unit lose its identify in manufacturing process and passing two or
more processes for completion. This system is used in continuous and mass production industries. The
output of one process is the input of next process. Moreover, the same amount of material, labour and
overhead is chargeable to each unit in processing.

The conditions for using process costing system are

Continuous mass production

Loss of identify of individual items or lots and

Complete standardization of products and processes.

Process costing includes single output or unit costing, operating co»ting and operation costing.

1. Single Output or Unit Costing

This method is used where uniform products or units are produced in large number and able to find out
cost per unit or product. The expenses are recorded in stage wise production of units or products. The
number of units produced to get unit or single output cost divides the total production cost. Marble
quarrying, mining and steel working industry are using generally single output or unit costing.

2. Operating Costing

This method is used when the services are rendered to produce a product. Production is not possible
without such service. Expenses are incurred to generate and render service to the production process.
Composite cost units may be used such as tone miles, passenger miles, kilowatt/hours and the like.
Transport industries, Hotel and Hospital industries are generally using operating costing system.

3. Operation Costing

In certain organization, there is a simultaneous manufacture of many parts through combinations of

many operations. Therefore, each operation is considered as cost centre. In this way, the costing of each
operation is determined in order to find out the cost of finished product. This system is used when large
quantities of standard units are produced under repetitive conditions.

C. Composite or Multiple Costing

In certain manufacturing concern, it is difficult to use either job costing or process costing. For example:
Manufacture of aeroplane, which involves many operations and processes. Hence, it is advisable to use
more than one method of costing i.e. multiple or composite costing. Other such manufacturing
industries are motorcars, cycles, radios, computers, television and the like.

D. Farm Costing

The agricultural firm differ from other manufacturing concerns in many aspects. Manufacturing
concerns are giving standard output. But, the agricultural firm cannot do so. Plant of firm also differ
from one place to another since the soil condition is varies.

The farm production is highly influenced by nature of seeds used, climate, rainfall, irrigation, and nature
of maturing, quantity of fertilizers and pesticides used and nature of labour employed at different stages
from sowing to harvesting. But, in the manufacturing concerns, products are not influenced by these
factors.

The one year output of farm is used as seed i.e., input in the succeeding year. Paddy, potato, onions, etc.
are preserved for one year for using them as seed in the next year. Thus, a new costing method has
been applied to farm so as to suit their purpose and is known as farm costing.

India is a agriculture country and its economy is fully based on the agricultural produce. If a farm
produce only one crop, the period cost is being decided by the number of units produced. Sometimes, a
farm produce more than one crop, if so, cost is ascertained after proper allocation of expenses to
different crops.

You use the weighted average where there is only one line of inventory and that it can only be applied
where newer and older lines alternate. It determines the average cost of all items currently in the
inventory. When the company adds a new inventory, its average cost is computed first before it is added
to the existing pool. Both inbound and outbound prices must be calculated in this case.
Specification identification determines the specific cost of each item used in the production process or
sold. This method is effective for companies that purchase expensive items.

Job Costing

Job costing determines the cost of labor, materials and overhead costs for certain jobs. Job costing
traces the specific costs resulting from individual jobs and evaluating them to see if it is possible to
reduce them in future jobs. Other companies use this methodology to see if it is possible to spread the
excesses to the customers. In case the job runs for an extended period, the accountant can periodically
determine the cumulative costs over that timeline and give a warning to the management if they seem
to be running out of proportion. One disadvantage of job costing is that it usually results in an
overwhelming number of transactions. It also requires a lot of software applications to manage and
update all the costs correctly.

Standard Costing

Standard costing is one of the costing methods used by manufacturing companies to determine a
uniform rate for materials used in production or inventory accumulation. Standard costing is usually a
responsibility of the purchasing department. The accountants must establish all the costs associated
with labor and production to come with an accurate standard rate. With standard costing, organizations
can produce goods up to certain amounts and monitor them by analyzing all the variables affecting the
sales and production processes. It allows accountants to analyze the market and come up with suitable
modifications if the need arises. Standard costing is appropriate for organizations that make similar
products repeatedly.

Direct Costing
Direct costing involves allocating certain portions of variable costs to the overall price of the product.
Direct costs are also known as variable if they regularly change. Direct costs can include commissions
and supplies. They can also include the cost labor, material or power consumption.

Direct costing allows managers to get an estimate of the minimum pricing required to sell products that
increase in value over time. It is a useful methodology for short-term decisions based on a price of a
particular product. However, direct costing does not cover long-term pricing. Hence, most managers do
not use it when applying an appropriate pricing strategy to be used for an extended period.

Target Costing

Target costing takes a different approach. It is used to determine the overall life-cycle costs of product
required to achieve a particular functionality and quality. It involves subtracting a projected profit
margin from a competitive market price. It attempts to determine the future costs of a product and how
they will impact prices and profit margins of a company. Most organizations will most likely try to
predict the future prices of their products. Hence, this is method is still relevant among manufacturing
companies in the United States.

One of the main advantages of target costing is that it is self-evident. Organizations can accurately
determine the future performance of a product. Those that are unlikely to perform can be modified or
scrapped off. However, target costing requires a lot of labor to keep track of emerging trends. Target
costing makes it more expensive to employ amongst the other costing methods, especially in small
companies.

Activity-Based Costing
Activity-Based Costing(ABC) determines the total activities of the organization and assigns indirect costs
to products. The system takes into account the relationship between costs, activities and the products.
This method allows companies to have a clear picture of profitable products and those that need
modifications to perform well in the market. Manufacturing companies believe that ABC is a robust
system that ties overhead costs to the company’s production activities that produce revenues. Those
who oppose ABC claim that the total benefits associated with the method are not worth the amount of
money channeled to it. A company that produces few products has limited visibility and variability in
future and cannot use this method cost-effectively.

Contract Costing

Companies often use contract costing for big projects. The project may involve a lot of expenditure,
extended periods of time of time and varying the scope of work. The projects that can necessitate
contract costing include construction of bridges, buildings, and roads. Some companies may use a
simpler form of contract costing that treats individual jobs as separate units. Industries such as bakeries
and pharmaceuticals usually prefer the simpler version of contract costing.

These costing methods can also come in handy when establishing a quality control plan. A quality
control program is necessary for creating products that exceed the expectations of the customers.
However, companies need to use reconciliation of costs and financial accounts to achieve optimal
results. Each costing method has its unique value, companies can come with a good price point that
enables them to compete fairly in the market.
A process cost system (process costing) accumulates costs incurred to produce a product according to
the processes or departments a product goes through on its way to completion. Companies making
paint, gasoline, steel, rubber, plastic, and similar products using process costing. In these types of
operations, accountants must accumulate costs for each process or department involved in making the
product.

The next picture shows the cost flows in a process cost system that processes the products in a specified
sequential order. That is, the production and processing of products begin in Department A. From
Department A, products go to Department B. Department B inputs direct materials and further
processes the products. Then Department B transfers the products to Finished Goods Inventory.

There are two methods for using process costs: Weighted Average and FIFO (First In First Out). Each
method uses equivalent units and cost per equivalent units but calculates them just a little differently. In
this class we will be covering the weighted average method only.
Weighted average costing is one among many different types of inventory cost accounting methods that
companies use. Other common methods include the more common last-in, first-out, or LIFO method,
and the first-in, first-out, or FIFO method. Standard cost accounting simply uses a fixed price to
determine inventory cost. Weighted average valuations involve proportional treatment of both the cost
of goods sold and the inventory in stock at the time of valuation. This means that both are treated the
same when it comes to determining value. Other methods, such as the LIFO or FIFO methods, may
ascribe different values to older inventory and newer inventory.

Understanding how some specific industries use the weighted average calculation can help make better
sense of the methodology. The weighted average of inventory is simple to calculate and can be
determined by using two or more lots of the same inventory item. For instance, assuming that a
pharmaceutical distributor purchased 10,000 Viagra pills at $1 each and then later purchased another
7,500 at $1.10 each, average weighted cost would be $1.04 per pill. This would be determined in the
following manner: 10,000 x $1 = $10,000; 7,500 x $1.10 = $8,250. These two figures are added together
to get a total cost of $18,250. This is then divided by the total number of units, 17,500, which results in a
weighted average of $1.04.

Process costing system is used for standardized production processes. Whenever a process cost sheet is
prepared for a department, the department most likely has some unfinished units either in its beginning
work in process, closing work in process or both. In such a situation, it is important to determine a cost
flow assumption, i.e. to agree on the order in which costs are transferred out to the next department.
There are two cost-flow assumptions: first-in-first-out (FIFO) and weighted average.

In the weighted average method of process costing, the costs are averaged out and evenly applied to
both units transferred out and units in closing work in process. Unlike FIFO method, which assumes
costs introduced first into a department are transferred out first, weighted average method does not
assume any specific order.

Process costing under weighted-average method involves the following steps:

Preparing the quantity schedule: i.e. finding units in the beginning work in process for the period, units
started or units transferred-in from prior departments, units transferred out to next department or units
of finished goods, and units in closing work in process.

Bringing forward the cost of units in the beginning work in process from last period. The cost should be
broken up into all its components: direct materials and conversion costs (=direct labor and
manufacturing overheads).

Finding the costs added in the current department under different heads: direct materials, direct labor
and manufacturing overheads.
Finding total cost to be accounted for under each head i.e. direct materials, direct labor and
manufacturing overheads. This would involve adding the cost included in the opening work in process
on account of direct materials, direct labor and manufacturing overheads to the corresponding amounts
added during the period on account of the relevant cost component.

Finding total equivalent units.

Finding cost per equivalent unit for each cost component by dividing the total cost for the cost
component by total equivalent units for the relevant cost component.

Allocating the cost between the units transferred out and units included in the closing work in process.

Example

Let us prepare a process cost sheet under weighted average method using the following data for
Company ABC's packaging department for the month of December 2013.

20,000 units in work in process as at 1 December: $20,000 direct materials and $40,000 for conversion
costs (i.e. $10,000 direct labor and $30,000 manufacturing overheads)

200,000 units transferred in from production department during the month: at a total cost of $555,000.

Costs added included: direct materials of $22,000 and conversion costs of $20,000.

180,000 units transferred to finished goods

40,000 units in work in process as at 31 December: 100% complete as to costs transferred-in, 80%
complete as to materials and 50% complete as to conversion costs.

Solution

Let us prepare the quantity schedule.

As at 1 December 20,000

Transferred in 200,000

Units to be accounted for 220,000

Transferred out 180,000

As at 31 December 40,000

Units accounted for 220,000

Next, calculate the equivalent units.

Transferred-

in Direct

Materials Conversion

Costs

Transferred out (A) 180,000 180,000 180,000

Units as at 31 December (B) 40,000 40,000 40,000

Percentage of completion (C) 100% 80% 50%

Equivalent units as at 31 Dec (D=B×C) 40,000 32,000 20,000

Total equivalent units (A+D) 220,000 212,000 200,000

By-product and Joint Product Costing

There are a few situations in which multiple salable products are created as part of a production
process, and for which there are no demonstrably clear-cut costs beyond those incurred for the main
production process. When this happens, the cost accountant must determine a reasonable method for
allocating these costs.

Advantages:

This type of costing involves using some rational means for allocating costs to products for which there
is no clearly attributable cost. The various methods for conducting these allocations are primarily used
for valuing inventory for external reporting purposes.

Disadvantages:

It is generally unwise to use this information for any management purpose, since decisions based on
allocated costs, with the intention of changing those costs, will usually fail. Consequently, by-product
and joint product costing is not recommended for anything other than inventory valuation.
This overview of the advantages and disadvantages of each costing methodology should make it clear
that they are not only wildly different from each other in concept, but also that they are all designed to
deal with different situations, several of which may be found within the same company.

Accordingly, a cost accountant must become accustomed to slipping in and out of a methodology when
the circumstances warrant the change, and will very likely use a combination of these systems at the
same time, if demanded by the circumstances.

Best Costing Method for Manufacturers

As a production manager the challenge is always how to determine what product mix is optimal and
how to price products to allow the company to achieve a desired profit margin – or better yet, maximize
their profit making capability.

In determining a price point you must first have a handle on your company’s material and labor costs,
these are the direct costs and the variable costs required to produce a given item. It is vital to have a
firm handle on these costs in making short-term and long-term pricing decisions.

Short-term vs. Long-term Pricing Decisions

When considering short-term pricing decisions organizations will primarily focus on direct costs which
are those costs directly attributable to production. In contrast, long-term pricing and profitability
decisions require companies to also include indirect costs and/or overhead costs. Generally speaking, if
the indirect costs stem from manufacturing operations (i.e. plant maintenance, rent, etc.) they are
referred to as manufacturing overhead. If indirect costs are associated from non-manufacturing
operations (i.e. admin supplies, G&A salaries, telephone, rent, heat, admin related depreciation, etc.)
they are referred to as administrative overhead. Therefore when evaluating long-term pricing it is
essential to understand how these costs impact pricing to insure the long-term success of an
organization.

What costing methodology is the best method for facilitating pricing decisions?

The answer to this question is largely dependent on the type of products a business produces and the
amount of effort that goes into determining how to analyze the costs associated with that business,
along with the desired rate of return for those efforts. For example, if I have a small shop where my use
of one method of costing (call it method-A) results in a very accurate cost analysis to determine pricing
but it takes three people working twenty hours a week to establish those rates versus another method
of costing (call it method-B) where my use create results that are within a few percentage points of the
same accuracy gained from method-A but requires only one person working four hours per week –
perhaps it makes sense to give up a small amount of accuracy for the labor savings realized in method-B
versus the more accurate costing that method-A requires. All manufacturing environments have a
specific costing and pricing philosophy that guides them as to which costing methodology to employ.

When accountants talk about costing methodology it can mean one of two things:

– First, there is the question of inventory costing

– Second, there is the question of production costing

The distinction being made here is that these are not the same. Let’s take a minute to look at the costing
for each of these two areas.

Inventory Costing

Inventory costing determines how purchased materials and materials made-to-stock are priced. Most
companies will employ one of the following types of inventory costing methodologies:

• FIFO (First-In, First-Out)

• LIFO (Last-In, First-Out)

• Average or Weighted Average Cost

• Specific Identification

These costing methodologies establish how inventory is costed (valued) each time new inventory is
added to an inventory pool. As inventory items are sold and/or used in the production process the cost
of the sale/WIP (Work In Progress) assigned to the transaction is derived from the number of items from
an inventory layer multiplied by the unit price of the inventory layer needed to satisfy the
sale/manufacturing requirement. Each method above determines the cost of the inventory that is
assigned to Cost of Goods Sold (CGS)/Work In Progress (WIP).

FIFO (First-In, First-Out) establishes that the oldest layers of inventory (based on received date or
manufacturing date) are used before the newer layers. Most companies employ this method as it is
usually a better correlation of material costs associated with a sale.
LIFO (Last-In, First-Out) establishes that the newest layers of inventory (based on received date or
manufacturing date) are used up before the older layers. Few organizations employ this method.
Additionally, it has been banned from use where organizations report their financial statements in
accordance with International Financial Reporting Standards. However, it does offer some validity when
the cost of an organizations newest inventory is co-mingled with existing inventory and neither is easily
discernible. As an example, take a coal mining company that extracts inventory from several mines and
subsequently trucks them to a single storage pit. As each load from each truck arrival is piled one on top
of the next regardless of which mine it came from, when the company makes a sale they use the coal
from the “top” of the pit, (i.e. newest coal first – or last in, first out). In this scenario, LIFO would be a
more accurate costing analysis as the top (newer) layers of coal will be sold before the older layers (the
oldest stuff put into the pit is at the bottom, and will be sold last).

Average or Weighted Average essentially establishes that there is only one inventory layer in inventory.
That layer is the “average cost” of all the items currently in existence in the inventory pool. Any time a
new layer is added to inventory, a new “per unit output price” is computed and applied to any outbound
inventory transaction until the next time that item is purchased and received into inventory. At that
point a new “outbound unit price” will need to be computed.

Specific Identification establishes that each inventory item is assigned a specific cost and when it is sold
or used in production the specific cost of the item(s) are assigned as CGS or WIP as appropriate. This
methodology makes sense if you are purchasing items that are individually purchased and they are
expensive, even if you are purchasing a group of the same item to which each item in the group carries a
specific cost that should not be allocated (spread) across the group.

Note: In the absence of items which have high price tags and/or unique cost structures, maintaining this
level of specific cost detail in inventory is unwarranted.

Production Costing

In the previous section we reviewed inventory valuation/costing alternatives, in this section we will
review the different production costing methods that may be employed. There are a number of varying
methods of production costing to choose from, each with their own benefits and drawbacks. The major
production costing approaches employed are as follows:

• Job Costing

• Standard Costing

• ABC Costing

• Direct Costing
• Target Costing

• Process Costing

Job Costing

Job costing (variable costing) involves taking materials, labor and overhead and accumulating them to a
production process to create an item(s) for sale; or made-to-stock to be sold later; or to be used in
future production. Costs are accumulated via transactions that occur for:

– Purchases/assignments of inventory to WIP

– Specific labor at an employee rate

– Level of assignment of manufacturing and administrative overhead absorbed by the product being
produced

This type of costing is used primarily by make-to-order production environments.

The advantage of job costing is that it allows organizations to track the exact cost to build one or more
products and it allows them to apply a markup to realize a desired profit margin for the product (albeit
that realization of profit margin is rare). In this environment, direct costs are easily attributable to a
product, and if an organization has good control on their variable and overhead costs it can yield very
accurate quoting/pricing.

One disadvantage that is generally attributed to job costing is that it normally results in a large amount
of transaction level activity that is required to track all the different costs continually being assigned to
the production process to arrive at accurate costing for a product. Not to mention it takes fairly
sophisticated software applications to accurately manage and update production costs correctly.
Additionally, overhead absorption to production activity can be elusive.

Bottom line with job costing is that if you’re a make-to-order manufacturer it’s imperative that your
environment be able to track real time costs per unit of production, as well as having the ability to
establish/manipulate overhead absorption as routinely as necessary without a lot of manual
intervention, if you hope to accurately price products coming out of production.

Standard Costing
Standard costing is perhaps one of the most common costing methodologies employed by
manufacturing operations. Standard costing methodology requires organizations to establish “standard”
rates for materials and labor that are used in production and/or inventory costing. Generally speaking,
production management or the engineering department is responsible for coming up with the expected
rates required for labor and duration times along with the material usage requirements required to
produce a single unit. Cost accounting is usually charged with coming up with appropriate overhead
rates of absorption per duration of production. The purchasing department is charged with coming up
with the standard rates for purchasing related activities.

The advantage to standard costing is that organizations can produce goods to a set of standards and
when actual rates or duration vary they can be monitored and compared by analyzing variances
recorded at the production level. Standard costing allows organizations to examine trends and make the
appropriate modifications to their standards as needed which helps with accurate pricing decisions. This
approach also makes it easier to budget and can quickly expose production anomalies to the cost
accounting department. Standard costing works well in organizations that repeatedly make similar
products or companies that mass produce certain types of products.

There are often several disadvantages associated with standard costing. One you will hear frequently is
the actual time and expense it takes to set and maintain standards assigned to production activities (i.e.
engineering, materials, and overhead). Another is that invariably, as soon as you implement a standard
it becomes somewhat obsolete. However, the biggest disadvantage to standard costing is likely how an
organization determines that standard. If your organization establishes standards that are essentially
unachievable, then employees will become discouraged which can negatively impact production.
Conversely, if your standards are too relaxed employees may work to the standard which directly results
in wasted productivity directly resulting in lower efficiency and profitability.

Activity-Base Costing (ABC Costing)

Activity based costing is a costing methodology that aligns an organization’s resources and their activity
to the company’s products and/or services as it relates to their cost consumption. Unlike job costing
methods, ABC costing incorporates more indirect costs into direct production activities to help drive
pricing decisions. When executed properly ABC Costing can help organizations gain clarity into products
that are profitable and those that are not, which is valuable in determining a product’s life cycle, or
identifying areas where process improvement could produce better yields for existing products.

Proponents of ABC Costing believe it is a more accurate way to tie overhead costs to an organization’s
revenue producing activities, which in turn helps an organization’s cost control activities as well as
better and more accurate product lifecycle decisions.
Opponents of ABC Costing feel that the amount of effort and the additional cost required to gain that
level of cost clarity is not justified by the incremental benefits they would receive from it. For example, if
your organization produces relatively few products the cost visibility and variability is generally not too
difficult to attain and/or track. However, as an organization’s product mix expands, the more likely ABC
Costing techniques will become more relevant and justifiable.

Direct Costing

Direct costing is a costing methodology that only looks at variable costs (i.e. costs that increase or
decrease proportionally with production output). It does not consider fixed costs. Direct costing has
merit as an analysis tool for helping management make short-term pricing decisions.

The advantage to direct costing is that it helps managers who are not routinely tasked with having to
make costing and pricing decisions achieve a fairly accurate “minimum” price that is required to sell
incremental units of a given product.

The issue with this approach is that it is only useful for short-term decision making. It would be a fallacy
to assume that this approach will result in accurate pricing and profitability for the long-term. For long
term pricing, you must have a good handle on overhead costs. Therefore, job costing, standard costing
or ABC costing will yield more accurate results than direct costing for long-term pricing decisions.

Target Costing

Target costing takes a different approach to costing. Unlike the other “primary” costing methods
presented above that look at historical information in determining a company’s costing philosophy,
target costing attempts to predict future costs and how those costs impact product pricing and desired
profit margins. Obviously this method is not a fundamental costing method that conforms to US GAAP
or IAS standards but it does offer value added benefit and ultimately most organizations either directly
or indirectly will try to predict what’s going to happen and how that will impact the organizations
bottom line.

The advantages of employing a Target Costing approach is self-evident. By trying to be proactive in

product cost estimation, it stands to reason that these organizations have a better opportunity to
achieve a desired profit margin. Products within the product family the organization produces and sells
that do not, or cannot, meet a desired product level become candidates to be discontinued.
The disadvantages of Target Costing are equally self-evident. It generally requires a larger staff to keep
track of future trends which in turn makes these costing/pricing models costlier to develop and it can
also extend a products development cycle time.

So what costing model should manufacturers choose?

The costing philosophy/model that is best for an organization is largely a cost-benefit relationship
decision and there really is no wrong answer if it makes sense for your business. Organizations must
weigh the burden of accumulating the costing information (whether it be historic information or
attempts to predict the future) against what I would argue is the heart of the decision – the ease of use
of the method in achieving their desired profit margin. For organizations that produce relatively few
products, or products that are engineered/make-to-order, prior cost information is updated relatively
frequently in these environments and they enjoy virtually current costs, thus historical costs should be
fairly accurate and as a result job costing or direct costing may be a justifiable approach. With
organizations that have a wider array of products or mass produce similar products, being able to
directly associate costs to a specific product can be very difficult, if not impossible, to achieve (at a
minimum not worth the time and effort to attempt to achieve it). For these environments standard
costing or ABC Costing would likely be a better approach.