Costing is the process of tracing and allocating costs to a product, service, or a cost center (Drury, 2008). The cost of a product consists of both direct costs and a fair share of overheads. There are number of costing techniques that Monster Beverage can use that include process costing, job costing, absorption costing, and activity based costing (ABC).
Process costing assigns costs to products as the move through various stages or processes (Drury, 2008). In process costing, costs for each process are accumulated over a period such as a month and then the average cost is allocated to the products (Bendrey, Hussey, & West, 2003). Process costing is suitable in cases where the company is producing homogenous products on a continuous basis. Since Monster Beverage produces a variety of beverages, process costing may not be appropriate because there might be significant differences in the beverages they produce.
Job costing is an extreme alterative to process costing that calculates of each job on an individual basis. Job costing ensures that the quote for a job adequately covers for all the direct and indirect expenses associated with the job and yields a profit for the business (Bendrey, Hussey, & West, 2003). Job costing is popular in businesses such as construction and bespoke services. However, Job costing would not be a suitable costing technique for Monster Beverage because even though the company produces a variety of beverages, the various brands are homogenous. There would be no justification of costing each beverage on an individual basis.
Traditional absorption costing method allocates overheads to products based on the volume of the cost driver. In traditional costing, direct labor hours and machine hours are the most commonly used basis of allocating overhead (Drury, 2008). A company accumulates the total overhead incurred over a period, and then divides it by the total quantity of the cost driver consumed in order to get the overhead absorption rate (OAR). Products that consume higher direct labor hours or machine hours are allocated higher overheads, while those that consume less direct labor hours or machine hours are allocated lower overheads. However, there might be a weak correlation between the basis selected to allocate overheads and the actual overheads consumed. Consequently, the use of traditional absorption costing leads to inaccurate product costs.
Despite these advantages, Monster Beverages should be aware of some of the drawbacks of ABC that include:
Identification of cost pools and cost drivers is difficult and complex.
Despite these limitations of ABC, it is the most appropriate costing technique for Monster Beverages due to ABC superiority and accuracy in costing.
References
Bendrey, M., Hussey, R., & West, C. (2003). Essentials of management accounting in business.
London: Continuum.
Drury, C. (2008). Management and cost accounting. London: South-Western.
