What are the main differences between job, process, and activity-based costing?
Job costing is an accounting technique that involves finding the cost for each job or work order by tracking the expenses for creating a product. It is a method for recording costs for a manufacturing job and not the process. The costing method is used when manufactured units are significantly different from each other. An accountant keeps track of the costs for each job and maintains relevant data for business operations. In a manufacturing entity, for instance, the costs are maintained in work in progress account and are only transferred to the finished goods account once the job is complete. Job costing is used in industries that produce products as jobs (Drury, 2011, Kimmel & Kieso, 2016; Walther & Skousen, 2009).
Process costing is a method used to collect and assign manufacturing costs to units produced. It is used when nearly identically units are produced in large volumes. The technique is best suited where individual cost units cannot be differentiated from each other. In this case, the cost of every product produced is assumed to be similar to the expense of every other product. The costs are accumulated for a fixed period and summarized before being allocated to the units produced in the period under (Kimmel & Kieso, 2016; Lanen et. al 2017).
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Activity based costing is a technique that identifies activities within an organization and assigns the cost of every activity with resources to the products and services according to their consumption level. ABC is a costing and monitoring technique that involves tracing the use of resources and costing the final output. The resources are assigned to different activities and the activities to cost objects based on estimated consumption (Drury, 2011, Kimmel & Kieso, 2016; Walther & Skousen, 2009).
Is batch processing also viable for service companies? Explain and provide an example.
Batch processing can be difficult but not impossible in service companies. This is because some of the services cannot be performed in batches but require periodic activities to offer the services. However, batch processing can be used to process the cost of services received after a given period of eight hours or one week. Service companies can use batch processing to process monthly utility bills and operational costs (Drury, 2011, Kimmel & Kieso, 2016; Walther & Skousen, 2009).
Your textbook outlines three main similarities between job order costing and process costing systems. What are these three main similarities?
The two techniques have the same purpose of assigning manufacturing cost elements i.e. direct material, direct labour, and manufacturing overheads
The two systems accumulate the cost of material, labor and costs by debiting raw material to raw material inventory, production expenses to manufacturing overheads and factory labor to factory labor
The costs in the production account flow in a similar manner. The two systems assign the costs to the same accounts (Drury, 2011, Kimmel & Kieso, 2016).
How is manufacturing overhead calculated in each of the costing methods?
In job costing, the production expenses are assigned to each task based on a predetermined rate. The predetermined rate is usually established a year before being used to allocate manufacturing costs. In process costing, costs are assigned to departments or operations for the period. In activity based costing, the overhead cost per unit is calculated. The cost driver is also determined, and the two are used to allocate manufacturing costs depending on the units produced (Kimmel & Kieso, 2016; Lanen et. al 2017).
How are variances identified?
The manufacturing overheads are first estimated using the predetermined rates. The number of direct labor hours required to manufacture the product is also projected. Then calculate the standard fixed manufacturing rate. The fixed manufacturing overhead budget variance is determined by establishing the difference between actual fixed manufacturing expenses and estimated amounts (Drury, 2011, Kimmel & Kieso, 2016).
How might each of the costing methods be used in managerial decision-making?
Author's Corner: Costing Errors.
The different costing methods can be used by the management to make decisions on the volume of output that ensures optimum profits for the company. The administration can choose any method depending on the nature of their business and applicability of the technique to the enterprise. Job costing, for example, can be used to determine the costs that can be allocated to each task where process costing is useful in manufacturing operations that produce similar products. ABC can be utilized by a firm to compute the cost of each activity, and all the calculated values can be used to make informed decisions regarding the business (Drury, 2011, Kimmel & Kieso, 2016; Walther & Skousen, 2009).
Why is it important that a manager understands how product cost is determined?
Author's Corner: Alternative Costing Methods.
Managers need to be conversant with product cost calculation because their decision affects the entire costs structure. By knowing how the values are computed, managers can make informed choices as to what aspects can be changed to reduce or maintain the current production costs. Similarly, they will be aware of the various components that constitute the entire products cost (Drury, 2011, Kimmel & Kieso, 2016).
What is the alternative costing methods?
Alternative costing methods are techniques that are neither job, process, batch or ABC costing. An alternative method to the above is operations costing which is a hybrid of job and process costing. In this case, the first approach is used for products that are known, unique or customized while the second method is used for products that are produced in mass. Other alternates include direct costing and throughput costing (Kimmel & Kieso, 2016; Lanen et. al 2017).
Describe the scenario in which each costing method can best be used.
Operation costing can be employed where the products have different cost structures, and the accountant can separate the two. It is applicable where products undergo various stages, and it is possible to conduct job costing at one stage and process costing at another stage where mass production is involved. Direct costing is applicable where the costs can directly be attributed to the production and sales of a product. Some of the possible costs include commissions, direct materials, and piece rate labor. Throughput costing involves the analysis of how additional units impact the sales less variable costs of the entire company. The product price focuses on the level of performance generated per production time at bottleneck production (Drury, 2011, Kimmel & Kieso, 2016; Walther & Skousen, 2009).
What is the production cost report? Provide information that is relevant to this report
A production report is a report that indicates the entire cost of producing a product. It shows the type of expenses incurred by a department, company or cost center to produce a product and breaks it down to its constituents. The report summarizes the cost and production activities for a reporting period. It shows the cost to date, the estimated cost to produce similar products in future and the total cost incurred. In essence, the report is a summary of the four steps that are followed to assign costs to units that are either transferred out or in ending work in progress. Some cost reports are required by law, but others are intended to be used within the company. Companies produce cost reports depending on the type of industry they operate in and the nature of products that they produce. Production reports are used by the management to make decisions and to transfer cost from one account to another (Kimmel & Kieso, 2016; Lanen et. al 2017).
Activity-based costing is made up of four steps. List the steps. Provide detail about each step (so a person not familiar with this method can understand what you are conveying).
Identify activities that use resources and assign costs to the activities
Learn the different activities required to make a product, for example, imagine activities of making a soft drink from acquiring the raw materials, making the concentrate, filling, capping and packaging using shrink wraps. Depending on the product being manufactured, allocate the costs to each activity identified (Drury, 2011, Kimmel & Kieso, 2016).
Identify cost drivers
Different cost drivers like machine hours, customer served, labor hours, miles driven and operating hours can be determined. In our example of soft drink, machine hours, labor time and miles driven are some of the cost drivers that can be assigned to electricity cost, labor cost, and automobile respectively. Cost drivers are related to the volume of production or the complexity of production or marketing process. The managers should consider the causal relationship i.e. the cost driver should ideally relate to the cost assigned to the manner should also examine the benefits received, i.e. cost drivers should have the designated value in proportion to the received benefits. Some of the costs that cannot be assigned to products based on causality should be awarded by reasonableness (Kimmel & Kieso, 2016; Lanen et. al 2017).
Calculate activity rate
The same formula for predetermined overhead rates should be used to derive activity rates. The rate is calculated by dividing the estimated overhead by the estimated base or cost driver. The formula applies to all indirect costs i.e. manufacturing overhead, distribution cost administrative cost, selling costs and any other indirect costs (Drury, 2011, Kimmel & Kieso, 2016; Walther & Skousen, 2009).
Define an activity center
An activity center is a unit in an organization that undertakes some activity. For example, the costs of filling and packaging the soft drink would be assigned to to the activity center that manufactures the product. Every activity has associated costs, and the cost driver can be the number of inspections (Drury, 2011, Kimmel & Kieso, 2016; Lanen et. al 2017;).
References
Drury , C. (2011). Cost and Management Accounting: An Introduction . 7 th ed. New York : Cengage Learning.
Kimmel, P.D., Weygandt, J.J., & Kieso, D.E. (2016). Accounting: Tools for business decision making (6th ed.). Hoboken, NJ: John Wiley & Sons.
Lanen, W. N., Anderson, S. W., & Maher, M. (2017). Fundamentals of cost accounting . New York, NY: McGraw-Hill/Irwin.
Walther , L. L., & Skousen, C. J. (2009). Managerial and cost accounting . London : Christopher J Skousen & Ventus Publishing .
