Cost accounting is the “measuring, analyzing and reporting of financial and nonfinancial information relating to the costs of acquiring or using resources in an organization.” (Horngren, Datar, Rajan, 2012). There are many different methods available to determine the cost of each various stage or product involved in producing a cost object, this paper will explore the differences and similarities between job costing and process costing. A job costing system involves gathering all of the information about the costs that are associated with each service job or manufactured product. There are six steps involved in job costing. The first step is to identify the job that is the chosen cost object. A job cost record is used to record how many of each of the different materials is used in production, as well as how many labor hours are used to create the product. The second step is to identify the direct costs of the job. There are two types of direct costs that need to be calculated: direct materials and direct manufacturing labor. When employees order materials they are recorded on a materials-requisition record which has information about the cost of direct materials used on a specific job in a specific department. Direct manufacturing labor is accounted for using a labor-time sheet which has information about the amount of labor time used for specific jobs in specific departments as well as the wage earned per hour. Any costs other than direct materials or direct manufacturing labor are considered to be indirect costs. The third step is selecting the cost-allocation bases to use for allocating indirect costs to the job. Indirect costs are “expenses incurred in joint usage and, therefore, difficult to assign to or identify with a... ... middle of paper ... ...where it can be, whereas process costing is more of an overall costing for each job because it is cumulative of all costs involved in the production of a product, but job costing isn’t necessarily cost effective in every situation, so it is more appropriate to implement process costing in those situations. Works Cited Horngren, C., Datar, S., Rajan, M. (2012). Cost Accounting: A managerial emphasis (14th ed.). Upper Saddle River, NJ: Pearson Indirect Costs. (2014). Business Dictionary Online. Retrieved from: http://www.businessdictionary.com/definition/indirect-cost.html Process Costing. (2014). Business Dictionary Online. Retrieved from: http://www.businessdictionary.com/definitio/process-costing.html What is a job costing system? (2013). Accounting Tools. Retrieved from: http://www.accountingtools.com/questions-and-answers/what-is-a-job-costing-system.html
If done right, I believe that all of the costs can be allocated to each of the three products through both direct and overhead costs. The only direct costs that are being included currently are labor and manufacturing costs. I broke up overhead into overhead based off direct labor and overhead based on units sold.
The presentation of the material is in dollars only. Overhead is applied to products as a percent of direct labor dollar cost. Factory profit for each year is found by subtracting direct material, direct labor, and direct overhead costs from total sales. The overhead percentage is calculated at the same time budgeting and is applied as a single overhead pool throughout each model year. The consulting company used 435% of direct labor costs in 1987 for their study; the budgeted was actually 437% (OH/DL=107,954/24,682). A similar percentage applies in the following year (109890/25294=434.5%). However in the next two years, after the outsourcing of oil pans and mufflers was enacted, the allocation of overhead in...
Wilkerson uses a simple cost accounting system in which each unit is charged for direct labor and material costs in addition to overhead costs, which are allocated depending on the percentage of production-run direct labor usage. Under this system, the overhead percentage set by Wilkerson was 300%. This standardized system, however, did not reflect the specific complexities of each
An organization costing system is a system that helps the management with the strategy planning while the system plays an important role in providing accurate cost information about the products and customers (Curtin, 2006). UPS utilizes the Activity-Based Costing (ABC) system. ABC assumes that activities cause costs and that cost objects create the demand for activities (Marx, 2009). The key to cost allocation under ABC is to identify the activities that are performed to provide a particular service and then aggregate the costs of the activities (Gapenski, 2012). This is a marked departure from the practice of sharing overheads costs equally or overheads becoming part of the overall profit-loss estimate instead of component product pricing (Nayab, 2011).
A direct cost can be directly traced to producing specific goods or services (InvestorWords, 2008). Direct costs do not have to be allocated to a product, department, or other cost object. For example, if a company produces computer chips, the cost of the material and the employees’ salary are direct cost because both of these expenses are directly related to the production of the product. Indirect cost is the exact opposite of direct cost.
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.
These costs are on account with a specific work package. Direct costs are attributed to efforts made by the project manager, project team, and folks executing the work package. These costs signify actual outflow and are compensated as the project evolves. Examples of direct costs are labor, equipment, materials, and other (Gray & Larson, 2005).
[4] Colin Drury, Management and Costing Accounting, (7th edition), Chapter 3, Cost Assignment, p. 54-59
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.
In the 1970s due to limitations in traditional costing systems, Greater competition and further inaccuracies in costing products effectively encouraged businesses to seek out alternative methods to enabling them accurate and causal cost allocation , at the same time Activity-Based Costing (ABC) method came about, being quickly adopted by enterprises of many and various types
Cost allocation is the process of identifying, aggregating, and assigning of cost to various separate activities. There is no overly precise method of charging cost to objects, hence resulting to approximate methods being used to do so. Amongst the approximation basis used includes square footage, headcount, cost of assets employed, and electricity usage amongst others. The main aim of cost allocation is to spread cost in the fairest possible method and also to impact the behavior pattern of the cost.
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.
Cost Accounting: Its role and ethical considerations Introduction: Accounting is the process of identifying, measuring, and communicating economic information about an entity for the purpose of making decisions and informed judgements. The major areas of within the accounting are: Financial Accounting, Managerial Accounting/Cost Accounting and Auditing- Public Accounting Managerial accounting is concerned with the use of economic and financial information to plan and control the activities of an entity and to support the management in planning and decision-making process. Cost accounting is the subset of managerial accounting and it helps management in determination and accumulation of product, process or service cost. Role of Cost Accounting: Increased competition and uncertain business conditions have put significant pressure on corporate management to make informed business decisions and maximize their company?s financial performance. In response to this pressure, a range of management accounting tools and techniques has emerged.
For example: with the increase of the number of products produced, the cost of operating a machine also increase. Second we have batch level costs which is associated with batches; producing a multiple units of the same product that are processed together is called a batch. The third type is product level costs which arise from any activity in order to support the production of products. The fourth and the last type is facility level costs, this costs cannot be determined with a particular unit, product or batch; this costs are fixed with respect to batches, products and number of units produced. A single measure of volume is used for allocating costs to each service or product in traditional method for example: direct material cost, machine hours, direct labor cost and direct labor hours. A cost driver is an activity that generate costs, it can be generated by two types of costs the first is a particular machine 's running costs where the costs is driven by production volume as machine hours; the second is quality inspection costs where the cost is driven by the number of times the relevant activity occurs as the number of
The first one being weighted average costs which assumes that all costs regardless of if they are accumulated in a previous period or the current one are grouped together and assigned to produced units. The weighted average method is commonly used in instances where there is no standard costing system. The second is the FIFO method which means “first in first out”. FIFO costing is utilized when there are significant changes in product costs from each period. When this occurs management needs to be aware of the new costing levels so it can re-price products appropriately, determine if there are any problems with internal costing that requires a solution or if there is the need to alter manager performance-based