BUS 5110: Managerial Accounting-Written Assignment Unit 2
Introduction
The proposed estimate of a product (costing) depends on the type of products a business
produces and the amount of effort that goes into analyzing the costs associated with the unit
product, the process and activity. The business therefore links the cost of production of a product
with the desired rate of return for those efforts. The three costing methods to be discussed are the
Job order costing, process costing and activity based costing which have their own methods,
benefits and drawbacks.
Job Order Costing
It is a costing method in which business owners trace materials and labor costs directly to
products (David Ingram, 2019). The actual labour and material that goes into each product is
tracked and allocated to that product (Walther & Skousen , 2009). It is most suitable for
companies that manufacture many types of products, or make products in batches.
Process Costing
Under a process costing system, costs are aggregated within departments, with each department
being treated like a job in a job order costing system (David Ingram, 2019). According to
Walther and Skousen (2009), costs are pooled together during production and output is measured
in aggregate quantities. It is most suitable in situations where the company produce homogenous
products in continuous processes. For example, consider the costing issues faced by the
companies that produce the lumber, paint, bricks or other such homogenous components used in
building a home.
Activity Based Costing (ABC)
It is a costing system which involves tracing costs and assigning them to activities (e.g. training,
client development, etc.) after which an allocation model can be used to attribute activities to
jobs, enabling a reasonable cost assignment (Walther & Skousen, 2009). ABC works best in
complex environment where there are many machines and products, and tangled processes that
are not easy to sort out.
Comparison of Various Costing methods
Differences
Job order Costing Process Order Costing Activity Based Costing
costs are calculated when costs are calculated at the end of period Costs are traced and assigned to
a job activities
Unit cost computed Unit cost computed by department Unit cost computed by activity
by job
Heterogeneous Homogenous products Both types of products
products
Low production High production volume Either production volume
volume
Based on specific Cased on continual process Based on activity
unit
Benefits
Job Order Costing Process order Costing Activity Based Costing
Allows managers to calculate the profit Average cost easily Provides realistic costs of manufacturing
earned on individual jobs determined for specific products
Gives managers the advantage of being able Expense allocation easily Identifies inefficient processes and target
to keep track of individuals' and teams' made for improvements
performance
Budgetary control system followed Use of standard costing Determines product profit margins more
system is very effective precisely
Actual costs and budgeted costs are Allows managers to get Allocates manufacturing overhead more
compared detailed information on the accurately to products and processes
production statistics
Disadvantages
Job Order Costing Process order Costing Activity Based Costing
No standardization Average cost is used to value the Identification of activity involves much
product work
More manual work involved Cannot provide accurate More technical work is required
estimate in case of single
process and many products
Job costing is expensive The cost may not be Very costly to implement
sustainable for all cases
Employees are required to track all Presumes that production activity
materials and labor used during the job of a factory is divided according
to processes
Conclusion
From the analysis we can see that the various cost methods have their circumstances and
industries under which they can best be utilized. For this reason one cannot prefer one type to the
other. However based on situation of Wet suit world, the best method of costing would be
process costing method as it is most suitable in situations where the company produce
homogenous products in continuous processes.
References
David I. ( 2019). Advantages & Disadvantages of Job Order Costing & Process Costing.
https://smallbusiness.chron.com/advantages-disadvantages-job-order-costing
Jim W. (2019). Difference between Job Costing and Process Costing.
https://managementstudyguide.com
Pranav K. (n.d). Process Costing: Meaning, Features, Advantages and Limitations.
https://www.yourarticlelibrary.com/cost-accounting/process-costing/process-costing-meaning-features-
advantages-and-limitations/62155
Walther, L. M. & Skousen, C.J. (2009). Managerial and Cost Accounting.
https://library.ku.ac.ke/wp-content/downloads/2011/08/Bookboon/Accounting/managerial-and-
cost-accounting.pdf
