Question

• A new client owns and operates of manufacturing business. The client needs to set up a proper cost accounting system (e.g., job order cost, process cost, and ABC) for the business.  This client is seeking general advice as to which type of system is appropriate for the business.

• In a new post, use the Reply button at the bottom of this page to respond to the question below:
• • Discussion Question 1: Before you provide any advice, what are one or two initial questions you might ask to learn more about the business and manufacturing operations.
  • Discussion Question 2:   The client would like you to differentiate the benefits and disadvantages of each system.
• • Discussion Question 3: Let's assume the client is a commercial landscape designer and contractor. Which type of system would you recommend and why?

Answer 1

Discussion Question 1 :- Before providing any advice i will ask following initial questions :-

1) Whether your bussiness includes one or more activity ?

2) Whether the material provided by the customer or procured by you ?

3) Whether you bussiness more than one proccessing of the product to get the finished goods ?

Discussion Question 2 :-

Order Cost Method :-

Benifits

1. Job order costing system enables a company to make reliable estimates about the monetary values of materials, labor and overheads that will be spent while performing a job.

2. A more efficient job order costing system enables companies to make quotes that are low enough to be competitive and high enough to be profitable.

3.Companies can use the job order costing system to find the jobs that they are competitive at and the ones that they are not.

4.Job order costing also helps the company identify use its fixed assets appropriately.

Disadvantage

1. Job order costing systems have a massive paper trail. They function on the basis of this paperwork. This creates a lot of complications.

2. Measurement Difficulties: Job order costing is a very powerful concept in theory. But in practice, it is very complicated to implement. These difficulties are multiplied if the organization works out of multiple locations and conducts a wide variety of jobs

3. One of the major disadvantages of job order costing is that overheads are based on estimates. At the beginning of a job, overheads are not accurately known. This system, therefore relies on the experience and expertise of certain professionals and on empirical data

4. job order costing does not provide an effective way of controlling overhead costs

Process Cost

Benefit:-

1. Process costing is an easier system to use when costing homogenous products compared to other cost allocation methods

2.Business owners use process costing because it creates a flexible production process. Companies needing to refine their process can simply add or remove a process as necessary

Disadvantage:-

1. Process costing can create cost errors in the production system. Production cost errors often represent a significant disadvantage for cost accounting systems

2. Management accountants must calculate equivalent units in the process costing system. Equivalent units represent the amount of unfinished goods left in a process at the end of an accounting period, its very hard to calculate.

ABC

Benefit

• Provides realistic costs of manufacturing for specific products
• Allocates manufacturing overhead more accurately to products and processes that use the activity
• Identifies inefficient processes and target for improvements
• Determines product profit margins more precisely
• Discovers which processes have unnecessary and wasted costs
• Offers better understanding and justification of costs in manufacturing overhead

Disadvantage:-

• Collection and preparation of data is time-consuming
• Costs more to accumulate and analyze information
• Source data isn't always readily available from normal accounting reports
• Reports from ABC don't always conform to generally accepted accounting principles and can't be used for external reporting
• Data produced by ABC may conflict with managerial performance standards previously established from traditional costing methods
• May not be as useful for companies where overhead is small in proportion to total operating costs

Discussion Question no. 3 If the client is a commercial landscape designer and contractor, i would recommed to use Job order cost accounting system due to following reasons :-

1. The Client will be working on different sites, therefore have to quote the price as they take the contract, so job ordrer costing hepls in arriving the cost plus profit quicker than other methods.

2. Job order costing can help in focus of workers to a particuler work, which is benificial in our case, because client will work on different sites and take homogenious contracts.

3. Client can be more compititive by analysing the each cost, can quote the comptitive price.