Three Costing Methods OF JOB Order Costing, Process Costing, AND Activity- Based Costing PDF

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This is a paper on costing techniques and methods utilized for effective managerial accounting business organizations with pros, cons, and applications....

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THREE COSTING METHODS OF JOB ORDER COSTING, PROCESS COSTING, AND ACTIVITY-BASED COSTING.

LARRY LETTAU

DEPARTMENT OF BUSINESS ADMINISTRATION, UNIVERSITY OF THE PEOPLE BUS 5110: MANAGERIAL ACCOUNTING JUNE 28TH, 2020

JOB ORDER COSTING Job order costing is a system for assigning and accumulating manufacturing costs of an individual unit of output. Since there is a significant variation in the items manufactured, the job order costing system requires a separate job cost record for each item (or each job or special order). The job cost record will report each item's direct materials and direct labor that were actually used and an assigned amount of manufacturing overhead. The job cost records also serve as the subsidiary ledger or documentation for the manufacturer's cost of the work-in-process inventory, the finished goods inventory, and the cost of goods sold. The job order costing system is best used when the various items produced are sufficiently different from each other and each has a significant cost. (When a company's output consists of continuous flows of identical, low-cost units, the process costing system is more appropriate.)

PROCESS COSTING Process costing is an accounting methodology that traces and accumulates direct costs and allocates indirect costs of a manufacturing process. Costs are assigned to products, usually in a large

batch,

which

might

include

an

entire

month's

production.

In

process costing systems, production costs are not traced to individual units of output. Costs are assigned first to production departments. Then assign the costs to units of output as they move through the departments. The process costing method is best used for processes that produce large quantities of homogeneous products.

ACTIVITY-BASED COSTING Activity-based costing is a costing method that identifies activities in an organization and assigns the cost of each activity to all products and services according to the actual consumption by each. This model assigns more indirect costs into direct costs compared to conventional costing. Once costs are assigned to activities, the costs can be assigned to the cost objects that use those activities. The system can be employed for the targeted reduction of overhead costs. This method is best used in complex environments, where there are many machines and products, and tangled processes that are not easy to sort out. Conversely, it is of less use in a streamlined environment where production processes are abbreviated. COMPARING PROCESS COSTING AND ACTIVITY BASED COSTING The process costing method is best used for processes that produce large quantities of homogeneous products, also process costing is used for standardized products and large production runs while Activity based costing assigns more indirect costs into direct costs compared to conventional costing. COMPARING JOB ORDER COSTING AND PROCESS COSTING Job order costing is used for unique products, while process costing is used for standardized products.

Also,

Job

order

costing is used for

small

production

runs,

and process

costing is used for large production runs. COMPARING ACTIVITY BASED COSTING AND JOB ORDER COSTING Activity based costing model assigns more indirect costs into direct costs compared to conventional costing. This method is best used in complex environments, where there are many machines and products, and tangled processes that are not easy to sort out while Job

order costing is used for unique products, while process costing is used for standardized products. PROPOSAL FOR THE COST METHOD WET SUIT WORLD SHOULD USE. After looking at the uniqueness of WET SUIT WORLD business activities, I have come to the conclusion that “Activity Based Costing Method” should be used as the costing method. Activity Based Costing Method allows its use for processes that produce large quantities production, also process costing is used for standardized products and large production runs. According to the information given to us, Wet suits uses the same material to produce all the different sizes and they all come in black. Also, it was said that all the suits undergo the same production. This is one of the characteristics of activity-based costing method, its used for large productions and standardized products.

REFERENCES 1. Accounting Tools February 06, 2019 Difference between Job costing and Process costing

https://www.accountingtools.com/articles/what-is-the-difference-between-job-costingand-process-costi.html 2. Principles of accounting.com Process costing and activity based costing

https://www.principlesofaccounting.com/chapter-20/ 3. Accounting Coach Process Costing https://www.accountingcoach.com/blog/what-is-

process-costing...