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.

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

Question 1:

2 questions to ask

· Is the product produced based on customer order or market order?

· Is the production units customised or standardised?

Question 2

Job Costing

Advantages

· Job costing helps in determining accurate cost for each job.

· Job costing helps in determining and fixing the selling price.

· Job costing helps in achieving profitablity targets.

· Job costing helps in evaluation of which jobs are profitable and unprofitable.

Disadvantages

· This system is very costly to maintain as it needs individual records as it needs additional manpower

· It cannot be applied for mass production units

· This system is suited only for customised orders

Process costing

Advantages

· Useful for firms having standardised units production

· This costing method can be applied for firms having mass production

· This system helps in calculating abnormal gain and losses in the manufacture

Disadvantages

· This system is not useful for orders which are customer specific

· Process costing is not useful for items which are of high value and which needs specific attention

· This costing method is over-simplified as it calculates cost over all units produced

ABC method

Advantages:

· Helps in accurate product costing since cost are allocated based on rational basis like activities consumed

· Helps in accurate product pricing due to accurate product costing

· Helps in elimination of non value adding activities

· Helps in performance appraisal since accountability is there for activities

Disadvantages:

· Not useful for organisation where there is more cost involved in implementation compared to benefits derived

· ABC costing is not useful method when there are only cost driver for overheads

· This method requires lot of time to study and implement

Question 3:

Job costing is recommended due to the following reason

· The orders are customer specific

· The orders given by customer have specifications which differ from each other

· The cost can be identified with each order separately based on Material requisition slip and time sheets maintained

· Profit can be determined for each job order.