Cost Management
Cost systems
Job-order costing accumulates costs by job; process costing averages costs over equivalent units, using either weighted-average or FIFO. Overhead is applied with a predetermined rate (estimated overhead / estimated base); the difference is under- or overapplied overhead, closed to cost of goods sold if immaterial. Activity-based costing assigns overhead through activity cost pools and drivers, improving accuracy when products consume overhead differently.
Joint products and byproducts
Allocate joint costs by sales value at split-off, physical units, or net realizable value. Joint costs are sunk at the split-off point and are irrelevant to a sell-or-process-further decision - compare incremental revenue with incremental processing cost only.
Relevant costing rules
Include only future, differential cash flows. Exclude sunk costs (past costs, book value of existing equipment), allocated common fixed costs, and unavoidable costs. Include opportunity cost. Typical applications: special orders (watch for lost regular sales and idle capacity), make-or-buy (add opportunity cost of freed facilities), keep-or-drop (only avoidable fixed costs matter).
Strategic tools
Target cost = market price - desired profit, followed by value engineering. Kaizen costing targets continuous reduction. Life-cycle costing considers all costs from design through disposal. Throughput = sales - direct materials; the theory of constraints identifies the bottleneck, exploits it, subordinates everything else, and then elevates capacity.
Worked example
A company has idle capacity and receives a special order for 2,000 units at $22. Variable cost is $15 per unit; fixed overhead of $40,000 is already absorbed by regular production. Incremental revenue = 2,000 x $22 = $44,000. Incremental cost = 2,000 x $15 = $30,000. Incremental profit = $14,000, so accept. If the order required displacing 2,000 regular units contributing $12 per unit, the $24,000 opportunity cost would reverse the decision.