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The value and importance of job order costing
The value and importance of job order costing
Job order and process costing systems - quiz
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Abstract
Variable costing and absorption costing produce different net operating income figures and the differences can be quite large
Job-order costing and process costing are two common methods for determining unit product costs Ordinarily, variable costing and absorption costing produce different net operating income figures, and the difference can be quite large. absorption costing is the most common approach to product costing throughout the world. absorption costing—the most widely used method of determining product costs—can artificially increase profits when managers choose to increase the quantity of units produced. Numerous organizations have incorporated activity-based costing in their method of calculating production. Activity-based
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Traditional cost accounting (TCA) method refers the absorption costing where all manufacturing cost, both fixed and variable are assigned to a unit of production (Garrison, Noreen, & Brewer, 2015). Under traditional cost accounting units of production include the distribution of manufacturing overhead cost to the products assembled and Indirect costs assigned to the Items manufactured on the basis of quantity produced such as the number of units manufactured and the direct labor hours or production machine hours that are used to make the product. A basic traditional costing example would be a company that makes widgets makes 1 million of them per year. To do it, it could require five full-time employees, each working 2,000 hours, plus another three supporters, also working 2,000 hours each. In the process of making widgets, it spends $1 million. Its overhead rate would be the result of dividing the $1 million in cost by the 10,000 hours of direct labor. This works out to $100 per hour (Lender, …show more content…
For this reason, traditional based cost systems misrepresent the cost of the product. In other words, it is assumed that each time a unit of product is manufactured it incurs a cost. The method is not totally useless and can be used on certain direct costs. However, for activities that are not performed directly on the product, the method is flawed at best. This is due to the fact that most companies today are made up of more complicated cost drivers and activities. The traditional cost accounting system end up with cost of goods sold on the bases of absorption cost and includes production costs that can only be used in external reporting. “Fundamentally, traditional costing systems try to assign cost directly to products, rather than to activities first and then from the activities to product units. The typical cost report gives information on what is spent, but not why it is spent” (Marx, 2009). As stated before job-order costing is one of the traditional systems and is used when many different jobs or products are worked on each period. Some examples of business that use traditional cost accounting include greeting card companies, commercial aircraft production, major construction companies, Medical service industry, law firms and retail companies. Process cost accounting is also a traditional accounting system that is used when mass production of similar unit production cost cannot be
Activity-based costing (ABC) is a costing method that is usually used as a supplement to a company’s usual costing system, and is therefore used for internal decision-making. It is designed to inform managers of costing information for decisions (strategic and others) that potentially affect capacity and consequently “fixed” as well as variable costs. In addition, ABC can also be used to pinpoint activities that would benefit from process improvements.
Roybal, H., Baxendale, S.J., and Gupta, M., (1999), “Using Activity-Based Costing and Theory of Constraints to Guide
This paper is going to identify three type of companies that use different costing systems (job costing system, process costing system, and activity-based costing allocations (ABC) ). Also, this paper is going to compare and discuss the similarities and differences you see in the companies.
Conventional Activity Based Costing (CABC) was first introduced by Robert Kaplan and Robin Cooper in the late 1980s through a series of papers published in the Harvard Business Review. The method aimed to correct deficiencies with the standard cost systems; the systems which attempted to cram all of a company’s costs into three broad categories – labor, materials, and overhead (Kaplan, 2007, p. 15). Such a system lacked the resiliency and versatile data management that was necessary to adapt to market demand changes that came with the twentieth century. While businesses improved to meet the market demands with services such as increased product variety, smaller order sizes, direct delivery, and specialized technical support, their traditional cost systems could not support efficient resource allocation for the rising costs to provide all those services. CABC sought to fix these issues. Cooper and Kaplan’s ABC system improved efficiency by assigning costs down to the product/orders level, enabling managers to better recognize where money was being wasted and where it needed to be invested. The basic model looked like this:
The costing system is a system that is used throughout businesses that offer a service. “A standard costing system uses standard costs and quantities of all three types of manufacturing costs: direct materials, direct labor, and factory overhead” (Blocher 2016 p. 97). Companies utilize the costing system to monitor the actual product usage compared to prior usage. Contractor use this system when bidding on jobs; once they collect specific instruction for the requested job they factor in the amount of material, labor, and other overhead costs then provide a quote for the assignment. “Strategic cost management is deliberate decision-making aimed at aligning the firm's cost structure” (Anderson & Sedatole 2003). Red Lobster and Kroger are examples
It was the year 1987 when the Gartner Group popularized the form of full cost accounting named Total Cost of Ownership (TCO)(author, Gartner Total Cost of Ownership). Originally TCO was mainly used in the IT business sector. This changed in the 1980’s when it became clear to many organizations that there is a distinct difference between purchase price and full costs of a products ownership. This brings us towards the main strength of conducting a TCO analysis, besides taking the purchase costs into account, which consist of the amount a money an organization pays for the required service, product or capital outlay. It also considers 1. Acquisition costs; these can consist of sourcing, administration, freight, and taxes. 2. Usage costs, which consists of the costs associated with converting the given product or service into a finished product. And finally 3. End of life cycle costs; the costs or profits incurred when disposing of a product. TCO can be seen as a form of full cost accounting; it systematically collects and presents all the data for each proposed alternative.
Process costing System is an accounting expression which describes one method to determine the manufacturing costs to the units manufactured . Processing is typically used when similar units are mass produced. Also process costing system is a type of accounting process costing which is used to determine the cost of a produced inventory. Chartered Institute of Management Accountants (CIMA) defines process costing as " The costing method applicable where goods or services result from a sequence of continuous or repetitive operations or processes. Costs are average over the units produced during the period, being initially charged to the operation or process "( College Accounting Coach, 2007). Process costing is more important and appropriate for all businesses producing identical products during which production is an ongoing flow. Toyota is on the of the major companies in the world that used well-known new philosophic management to produce identical products using process costing system.
The contained paper has been prepared with objectives of elaborating over the three different costing methods namely, Absorption/Full Costing, Variable/Marginal Costing, and Activity Based accounting. The first segment of the report seeks to define and illustrate the costing methods based on the personal understanding of the writer gained through the class room and the academic readings. Part two of the report takes a form of short essay, written critically to evaluate the application of standard costing and variance analysis to any size of business, and concludes with a verdict that whether or not standard costing and variance analysis is applicable to each business with consideration of its costs and benefits of the system.
Absorption costing is defined as a method that includes all manufacturing costs, such as direct labor, indirect labor, variable overheads and fixed overheads. This approach also as called as full costing approach. Nowadays, a lot of companies use absorption costing method for external financial reporting purpose, matching concept is used in absorption costing. Assets like inventory affects the company’s ability to earn more profit, so in accounting field it match the expenses with the revenues that they produce is important. In addition, matching concept request company to record all the expenses that match their revenue to demonstrated company’s profitability in the specific accounting period. Under absorption costing method, fixed manufacturing overhead cost is determined by each unit of output. Moreover, when a unit of fixed manufacturing overhead is sold it will directly include in the Cost of goods sold account as an expense shown on the income statement and the rest of fixed manufacturing overhead that have not been sold would go to inventory account instead of count as expenses. Hence, the matching concept underlies the absorption costing because these expenses should be match the revenue generated from the sale of that inventory.
The overall purpose of cost accounting is to advise top administration and the management team on the most suitable and cost effective methods and actions to employ based on cost, capability and efficiencies of a given product or service. It can be defined as the method where all the expenditures used during execution of business activities are gathered, categorized, examined and noted down (Horngren & Srikant, 2000). Once these numbers are gathered and recorded the information is used to determine a selling price and/or to identify possible investment opportunities. Although the principal aim or function of cost accounting is to help the business administration with their decision making and business planning process, the cost accounting data
Hansen, D., Mowen, M., & Guan, L., Cost Management: Accounting & Control 6th ed., Mason, Ohio: South-Western
Others feel that ABC would be more widespread in industry if it were marketed better by the cost accounting profession itself [1]. As the dust has settled, ABC has turned out to be less a revolutionary technique than a useful refinement to proven systems. The costs of products and services must be accurate, or management can be misled. Decisions... ...
Managerial accounting has changed over the years. Managerial accounting focuses on more than the financial aspect. We will be looking at how managerial accounting affects the business world today. Business also look to the economy, federal taxes, and the financial market so it can make the best decisions for their business.
Cost accounting system has two types, job order costing, and process cost system. These two cost systems are very different, almost every company uses order costing or process costing. Starbucks, is a coffee shop where citizens congregate to drink there morning coffee, study, and or socialize. Starbucks is one of the oldest and largest privately held specialty coffee retailer in the United States. (Starbucks) Their passion is to discover the flavors you love and always bring it home, delivering the look, taste and aroma of the world’s best coffee and teas. Job order costing is a very easy way in order to help Starbucks managers to know how much profit their company (Starbucks) made.
Activity-based costing (ABC) is a costing method that is designed to provide managers with cost information for strategic and other decisions that potentially affect capacity and therefore “fixed” as well as variable costs. Activity-based costing is mostly used for internal decision making and managing activities while traditional costing method is used to provide data for external financial reports. Most organization uses activity-based costing as an addition system for using traditional absorption costing as sometimes the traditional cost system misleads the product’s profitability. In a company, there are many products on sale, if one product is sold at a high price with low product margin and a product with high product margin at a low price, it may result in a loss. In addition, due to the reason that cost drivers and enterprises business may change, activity-based costing analysis also needs to be revised periodically. This amendment should be prompted to change pricing, product, customer focus and market share strategy to improve corporate profitability.