Tea Factory Company Costing Techniques

Tea Factory Company Costing Techniques

Q2. Product Costing Techniques

The ultimate intention of any manufacturing and processing form is to have a high-profit margin. These industries always face the problem of determining the correct price to charge for their produced products. Therefore, companies should keep track of their inventory and production costs to maximize returns while minimizing the cost of production (Mislick & Nussbaum, 2015). The following analysis evaluates the ideal product costing options available for Tea Factory Company with the aim of enabling the management to choose the appropriate technique in the processing and sale of tea leaves products. This would act as a tool for decision making within the company.

In the manufacturing and processing industry, every specific company dealing with a specific line of product has different costing technique. The methods influence investment and decision-making procedures at the company (Bendrey, Hussey, & West, 2003). Tea Factory Company requires the suitable costing technique for it to profit from its tea processing business. It can adopt the inventory or the production costing techniques by considering the factors discussed in this analysis.

Inventory Costing

  • Tea Factory Company imports JAS organic tea from Japan and Kenya.
  • The company also imports additional production components from India and the United States while the packaging materials are bought within Australia. They all fall under inventory costing. They represent the amounts of the expenses incurred in the costs of the goods produced.
  • The costs assigned to these inventories should be taken into account in determining the costing technique. Based on inventory costing, two techniques will be considered.
  •  The First in First Out(FIFO) and the Last in First Out(LIFO) technique. The FIFO techniques are used to determine the price of inventories based on the time they were received or processed (Porter & Norton, 2016). It is mostly applicable in the foodstuffs. Since Tea Factory Company deals with the tea levels, the method might is applicable to its operations.
  • In LIFO techniques, the price of inventories is determined based on the time the last inventory was received or processed and is the first one to be sold (Needles, Powers, & Crosson, 2010).

Product-Costing Technique

This technique evaluates the various components of production. Some of the factors include the material, labor, and expenses costs. Determining the manufacturing cost and determining the maximum product cost might be very important in the running of the TFC company. The flow chart below illustrates how the product cost can be broken down.

The figure relates to all the costs Tea Factory Company has to incur in product costing method.

  • Raw material costs include JAS organic tea leaves, additives, chemicals, and packaging materials from various countries.
  • The labor costs included the cost incurred in production different Tea Factory Company tea brands.
  • Expenses include the rent paid on the leased offices, costs of specific machinery to produce different types of tea products, sales representatives’ expenses, marketing expenses and the regional management expenses.

By comparing the inventory and product costing techniques, the latter gives the comprehensive analysis and is easily understandable on how the costing process should be carried out (Armstrong, 2001). The inventory costing omits many useful costs like administrative expenses and cannot be effective in determining the costing technique at TFC. Therefore, I would recommend that TFC management adopts the product costing technique in determining the cost of the various products produced.

Q3. The Beneficial Method

In the calculation of the product cost, I would recommend Tea Factory Company to use product costing technique as an ideal method. The company can be able to monitor the exact cost of processing one type of the product incurring the least optimal cost. The method will result in increased sales and thus profit maximization. With the product costing technique, both negative and positive trends can be examining and appropriate measures are taken to ensure effective production of the goods in the company (Armstrong, 2001). Through direct costing, Tea Factory Company’s management can make decisions that can help in setting the price of the product.

The product costing technique integrates all components involved in the product of Tea Factory Company tea brands. Starting from the raw materials up to the management of the company, all these are included in the determination of the cost of the product. Thus, each and every component is included in the manufacturing process. This ensures that the price obtained is the accurate price of the product. Based on technique Tea Factory Company management can be able to evaluate which type of tea brand require the minimal cost of production to give maximum returns (Bendrey, Hussey, & West, 2003). The company might evaluate and weigh the option of employing many workers or integrating the modern technology for Tea Factory Company’s production processes. Despite the expensive nature of technology, employees should find it better in working at the company because wastages are minimized, errors are eliminated, and the company gets value from its investments (Porter & Norton, 2016).


Armstrong, M. (2001). A handbook of management techniques: The best-selling guide to modern management methods. Kogan Page Publishers

Bendrey, M., Hussey, R., & West, C. (2003). Essentials of management accounting in business. Cengage Learning EMEA

Mislick, G. K. & Nussbaum, D.A. (2015). Cost estimation: Methods and tools. John Wiley & Sons.

Needles, B.E. Powers, M. & Crosson, S. V. (2010). Principles of accounting. Cengage Learning.

Porter, G. A. & Norton, C. L. (2016). Financial accounting: the impact on decision makers. Cengage Learning