Azura Mohd Noor, Senior Lecturer, Faculty of Accountancy, Universiti Teknologi MARA, Cawangan Perlis.
He is the One who produces gardens, both cultivated and wild, and palm trees, crops of different flavours, olives, and pomegranates, similar (in shape), but dissimilar (in taste). Eat of the fruit they bear and pay the dues at harvest, but do not waste. Surely, He does not like the wasteful.
Al Qur’an, Al-An‘âm, 141
Manufacturing plays a major role in the economic stability and success of a country. The Quran applies the concept of production in a very broad sense and strongly emphasizes the understanding of manufactured products, whereby the product must relate to and aim to satisfy human needs (Alimuddin, Ashari, & Ferdiansha, 2014). Surah An-An’am, verse 141, as above mentioned the concept of production where effort should be used in getting result (production units) and no wastage are allowed which can be related to that producing in fulfilling the human needs. Production is defined as a process of transforming raw materials or inputs into finished goods or products that have value for customers in a manufacturing process using labour, machinery, and other means. Production in a capitalist system aims to maximize the return on investment using labour, machinery, and other materials as factors of production (Javaid, 2019). In other words, production produces products that people need and are willing to pay for, and that contribute to the betterment of the economy.
Preparing product costs is one of the most
important activities for any manufacturing company to determine the most
appropriate selling price that customers are willing to pay while achieving the
company’s target on profits. Cost of product is defined as the total costs
incurred from procuring raw materials, processing, and finishing the product for
sale to customers. They are also referred to as cost elements – direct material
costs, direct labour costs and overhead costs (Farkhodovna, 2022). The
research conducted by Alimuddin et al. (2014) revealed that in determining the
cost of production, we can only do justice if all the absorbed costs are
calculated as the cost of production, which includes the cost of material used,
direct and indirect labour costs, and other costs used to produce the product.
The need for more accurate costing with lower variances and more efficient cost control in companies is increasing, especially in the manufacturing sector. Therefore, it is important to know costs accurately and apply them to product prices (Bozkurt et al., 2014). This requires the use of an appropriate costing method to record and calculate costs. The costing method refers to systems used to allocate cost elements to cost objects or products. These are the methods used to determine product costs Different costing methods are used in different industries due to differences in the type of work, products manufactured, and services provided. For example, the costing method used in the construction of a hospital differs from that used in the manufacture of furniture. Basically, there are two methods of costing, as pointed out by Omesi (2022b), following the terminology of CIMA: (i) specific order costing (ii) operation costing (see Figure 1).
According to Omesi (2022b), the first group,
known as specific order costing methods, includes three types of costing
methods, namely job costing, batch costing, and contract costing. These methods
are applicable when producing customized products that depend solely on the customer’s specification or a specific
order from the customer, either order for a job (job costing), a batch (batch
costing), or a contract (contract costing). Since each customer has its own specifications, there is no standard
product, and costs are determined separately for each job order, batch,
or contract (Omesi, 2022b). This method is suitable for industries such as printing,
interior design, shipbuilding, construction, etc. On the other hand, the
second group called operation costing methods includes process costing, unit
costing, service-based costing, and multiple costing. They are applicable when standardized or identical goods are
produced in a sequence of repetitive and continuous operations or processes. In this method, the costs for each process or
department are collected, examined, accumulated, and determined. Then, the total
process cost is divided by the output of the process to determine the unit cost
(Omesi, 2022a). This method is suitable for industries such as textiles,
chemicals, sugar, cement, oil refineries, etc.
Determining the accurate costs involved in producing a product or service by applying an appropriate costing method is important primarily for deciding on pricing. Other purposes include cost control, new product development, consideration of customers, etc. Most companies set their prices based on their unit cost estimation. Price is defined as the value of a product or service set by a business in terms of money for exchange and which can be used to make a profit (Zulfikar et al, 2022, Kusuma, 2019). Setting competitive prices is possibly the most important factor in the success or failure of a business.
Abu Wa'il narrated that Qais bin Abi Gharazah said:
The Messenger of Allah (SAW) came to us, and we were what was called 'brokers,' he said: “O people of trade! Indeed, the Shaitan and sin are present in the sale, so mix your sales with charity.”
at-Tirmidhi Vol. 1, Book 12, Hadith 1208
According to the hadith above, the welfare of customers must also be taken into consideration when deciding on pricing while making profit for the company. According to Kusuma (2019), a fair price from an Islamic perspective is one that avoids manipulation or oppression which harms one person (group) and benefits the other. For a transaction to be fair and to give justice for all parties, the price should also reflect fairness.
In summary, costing a product or service involves three elements of cost, namely material, labour, and overhead. Achieving accurate product costs requires the use of the most appropriate costing method, such as specific order costing when a company receives a specific order from the customer, or operation costing when the company produces standardized and identical products through a repetitive and continuous manufacturing process. Accurate product costing results in the ability to set a competitive price for the product that will encourage customers to pay and achieve the level of profit sought by companies in the manufacturing industry, as well as in other industries.
References
Alimuddin, A. K., Ashari, M., & Ferdiansha, M. I. (2014). Production costing concept based on Islamic justice value. IOS Journal of Business and Management, 16(7), 19 – 28.
Bozkurt, O., Dokur, Ş., & Yildirim, A. (2014). The importance of cost calculation method in the accounting and management of Turkish operating costs: A research within the scope of TAS-2. International Journal of Academic Research in Accounting, Finance and Management Sciences, 4(2), 38-46.
Farkhodovna, U. I. (2022). Production costs, their content and description. Eurasian Journal of History, Geography and Economics, 9, 27-32.
Javaid, O. (2019). Islamic system of production and consumption: A guide for Muslim entrepreneurs. Journal of Business Innovation, 4(1), 1–12.
Kusuma, K. A. (2019). The concept of just price in Islam: The philosophy of pricing and reasons for applying it in Islamic market operation. In 5th International Conference on Accounting and Finance (ICAF 2019), Advances in Economics, Business and Management Research, 102, 116-123. Atlantis Press.
Omesi, I. (2022a). Costing methods II: Continuous operating costing. BW Academic Journal, 1(1), 32-54.
Omesi, I. (2022b). Costing methods I: Specific order costing. BW Academic Journal, 1(1), 47-69.
Zulfikar, M., El Fikri, M., Harahap, R., Pane, D. N., & Ahmad, R. (2022). Analysis of product quality, price, and location towards purchase decisions at office offices of small and medium business cooperatives in Medan City. Quantitative Economics Journal, 10(2), 92-102.
