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Written Assignment Unit 2
Job Order Costing, Process Costing, and Activity-based Costing
Student Name
Department of Business Administration, University of the People
BUS 5110-01 Managerial Accounting
Dr. Kathryn Denning
February 08, 2023
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Job Order Costing, Process Costing, and Activity-based Costing
A cost accounting system collects tools and procedures that organizations use to track
the resources used to produce and distribute services or goods to customers. Management
uses these methods and techniques to evaluate and reward worker performance (UKEssays,
2018). In this task, we define and explain the three cost methods, along with their benefits
and shortcomings, and provide a well-supported proposal for the cost method Wet Suit World
should use, along with a conclusion.
Costing Methods Explanation
Method 1 Job Costing
A job costing system calculates job costs based on unique jobs or orders. These orders
aren’t comparable (Walther & Skousen, 2009), so a unit of charge is a unique task or order
that requires matching materials. Jobs can be made up of single items or multiple units of the
same or similar products. Each job or work order uses a separate number when recording its
associated costs. This method of recording costs works well with jobs related to engineering,
vehicle garages, vehicle repair shops, printing and foundry. It's also used for building
construction, locomotives and similar industries (EduPristine, 2021).
Benefits: It can assist in providing appropriate information about manufacturing costs
and identifying the actual expense that the organization must incur before beginning the
manufacturing process. Furthermore, each order can be numbered ascending or descending
on a separate sheet, which provides the project type, cost, and work duration from start to
finish.
Shortfalls: Job order costing is restricted to only considering the production costs
without considering other cost-influencing factors. Because of this, it requires a significant
amount of writing to properly set up separate accounts for each production order. Each
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account needs to be properly followed up on as well as specific information about every order
needed (Contributor, 2020).
Method 2 Process Costing
Businesses use process costing to determine the cost of producing a given product.
This method employs many distinct and defined processes that span multiple steps (Walther
& Skousen, 2009). Each process is accounted for as a separate cost line in a financial
statement. Cost estimations for the next cycle are attached to the previous one. This method is
ideal for mass-produced items such as textiles, fuels and chemicals. Also suitable for mass
production are mining, brewing, paper and oil. It's also useful for other industries with
standard manufacturing processes such as cement, sugar, oil and varnish (EduPristine, 2021).
Benefits: One of the significant benefits of process costing over other cost allocation
methodologies is that it is an easier mechanism to use when costing homogeneous items.
Business owners allocate business costs based on the number of procedures each product
goes through in the manufacturing system. Because the entire production process is
structured and there are few adjustments, it is easy to calculate the cost of operations using
this method.
Shortfalls: It takes a long time to calculate operating costs for equal units or
unfinished products, and fails to determine actual spend. Also, because the costing process is
based on historical costs, existing cost data will not be useful for future management decision
making (Contributor, 2020).
Method 3 Activity Based Costing (ABC)
Conventional methods of accounting don’t properly identify the relationship between
a product’s pricing, overhead expenses and expenses (Walther & Skousen, 2009). In contrast,
indirect costs are more accurately attributed to products using other methods of accounting.
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It's difficult to determine the monetary costs of indirect expenses, such as office and
management staff wages. These expenses often appear in commercial or organizational
expenses that use overhead items (EduPristine, 2021).
Benefits: It details everything from the price of each component to the company's
overall overhead. By comparing these figures, managers can make better decisions, plan
work schedules, and lower expenses. (UKEssays, 2018).
Shortfalls: ABC is an unapplicable method for small businesses due to its high cost
and time commitment. The overhead costs are difficult to accurately categorize, making ABC
impractical for most business models. Additionally, ABC's focus on volume makes it
ineffective when overhead costs are a significant portion of overall costs. (Contributor, 2020).
The Process Costing Method Useful for Wet Suit World
The key points to note are the uniformity of materials and procedures in every Wet
Suit World production. Additionally, the company's lack of overhead expenses relative to
their production methods makes them unique. All wet suit manufacturing involves the same
steps. These procedures ensure that all suits meet quality standards. The previous observation
confirms that process costing applies to the Wet Suit World chain.
Conclusion
Cost analysis plays a critical role in the pricing of products. It also helps companies
make decisions about continuing or discontinuing certain productions. Calculating costs is the
core purpose of most cost estimation methods. By using the right method, companies can
avoid costly mistakes and losses that could cause them to fail financially.
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References
Contributor, C. (2020, September 21). What Are the Advantages & Disadvantages of Process
Costing?. Retrieved from https://smallbusiness.chron.com/advantages-disadvantages-
process-costing-4098.html
EduPristine. (2021, September 18). Costing Methods and Important Costing Terms.
Retrieved from https://www.edupristine.com/blog/costing-methods
UKEssays, L. A. (2018, April 25). Job Order Costing Process Costing and Activity Based
Costing. Retrieved from https://www.ukessays.com/essays/accounting/job-order-
costing-process-costing-and-activity-based-costing-accounting-essay.php
Walther, L. M., & Skousen, C. J. (2009). Managerial and Cost Accounting. Retrieved from
https://library.ku.ac.ke/wp-content/downloads/2011/08/Bookboon/Accounting/
managerial-and-cost-accounting.pdf
