Question

Knowing the various costing systems such as job costing, process costing, and activity-based costing. If a company was considering using one of these systems, what things should they consider? Provide 2-paragraph's discussing: The considerations that should be evaluated before selecting an appropriate costing system. What systems work better for different types of companies? When would each system be appropriate? The different types of information that would need to be determined, recorded and tracked. What types of costs would need to be tracked in each type of system? At what level would the costs need to be tracked (unit, batch, etc.)? What complications could arise from this?

Answer 1

job costing – This costing system is best in Manufacturing Company . This costing system help to identify usage if raw material , Equipment , labour hours .

What is job costing – This costing system represents accumulation or gather of the cost of raw material, labour and overhead for specific job wise. This is an excellent tools to tracking costing to individual job wise .With help of this costing system , accountant can easily make track on Variance of cost ( Actual Vs Budget ) project wise /Job wise .

Job costing consist of allocation of Material . It will follow path like Work in process to Finished goods Inventory – finally it will move to cost of Goods sold ( recorded sales transaction )

Job costing allocation of Labour – Labour may be charged directly to Job if we can identified cost project wise . Other than direct project cost , we can parked under “ Overhead cost”

Job costing allocation of Overhead .

process costing- This costing method used in Standardized product and use in large production units, Record all transaction with less time ,

This costing system also called as Operation costing. Under process costing flow would be like :

Raw Material ---Process 1 ---- process 2 – Finished goods

This method of costing applicable in relates to simultaneous , standardized vast product process .

Both direct as well as indirect cost charged to the process .

While calculating unit cost , accountant needs to consider all normal as well as abnormal

Losses

  Activity Based costing – under this costing method , an organization assign cost on each activity wise. This method of costing system mainly used in Manufacturing Operation . Recently service Industry also started to adopt ABC based system .

This method of costing mainly assign Overhead and Indirect cost to related products and services .An activity is a cost driver

This costing system help us to determine profitability – Product line wise

Under this costing system , we need to derive cost driver ( Like unit /Hrs) – calculate cost driver rate – Multiply cost driver rate with Cost driver

When would each system be appropriate—As already explained above , Job costing is the best In Manufacturing Industry. This costing system will help us to understand Job / Project wise tracking of Mateial Labour and Overhead cost . if any cost not directly allocated to project then captured the same as Indirect cost

In other side , Activity Based costing is also applicable in Manufacturing base industry . Under this system, we can more focus on allocation of Overhead cost and Indirect cost – activity wise and we can have a complete track on cost 9 specially overhead and indirect cost )

Process base costing also equally important where Production process in long and involved multiple division , unit involvement . We can easily track cost on each process basis . This costing system helps to identify cost of each process and the final product at short time period . We can easily calculated Unit cost

Method of production normally standardized in this method of costing , which will help to determine Average cost . Most important factor is this costing system involve less manpower and low cost as compared with Job costing .

Easy allocation base of cost . Under this costing method we use Standard costing system , which is very useful

What complications could arise from this?

Process costing – major negative factor is in this costing method we used Historical data , which might not be good for future decision

This costing normally based on Average cost , which might not be always show true and correct picture

Most disvantage is – if any error in one process , it will have subsequent impact

Job costing- Major disadvantage is this costing system still follow huge Paper base work. This process involves too many manpower and not at all cost effective .

In reality it is very difficult to implement . We normally face huge Measurement difficulties

While allocation of Overhead , company not used best method to allocate cost , which creates confusion with in Organization

Overhead cost calculation completely on the basis of Estimate

Activity Based Costing- This method of costing also very time consuming . This costing system also not cost effective . This costing system may not be useful where Overhead cost is less and this system not followed proper GAAP system