Unit 2 Written Assignment: Wet Suit World

BUS 5110
University of People
September 14, 2020
 Three Methods of Costing

Job Order Costing

Job order costing or job costing is a system for assigning and accumulating manufacturing

costs of an individual unit of output (Accounting Coach, n.d.). The costing method for job orders

is used when the various products produced are quite different from one another that each has a

significant cost. If the output of a business consists of continuous flows of equivalent low-cost

units, the costing method for the process is more appropriate (Accounting Coach, n.d.)..

Since there is a considerable difference in the products produced, the costing method for

job orders involves a separate record of the cost of each item (or each job or special order)

(Accounting Coach, n.d.). The job cost record would show the raw materials and direct labour

that have actually been used for each item and an estimated amount of overhead output

(Accounting Coach, n.d.).

Job order costing is applied by companies that produce goods and services according to

the requirements of customers (Accounting Coach, n.d.). For example, manufacturing companies

that will use job costing are machine tool manufacturing companies, clothing factories, and

aircraft manufacturing companies (Accounting Coach, n.d.). Service companies that will use job

costing method will include law firms, movie production, and accounting firms (Accounting

Coach, n.d.).

Processing Costing Method

When mass processing of identical goods happens, process costing is used where the costs

associated with individual manufacturing units cannot be distinguished from each other (Bragg,

2019). It is presumed that the cost of each product generated is the same as that of every other
product (Bragg, 2019). Under this concept, costs are accumulated over a fixed period of time,

summarized, and then allocated to all of the units produced during that period of time on a

consistent basis (Bragg, 2019). Examples of the industries where this type of production occurs

include oil refining, food production, and chemical processing (Bragg, 2019).

There are three types of process costing which include weighted average cost, standard

costs, and first-in first-out costing (FIFO). Weighted average costs assumes that all costs are

lumped together and assigned to produced units regardless of time period (Bragg, 2019). It is the

simplest version to calculate. Standard costs method is when standard costs are assigned to

production units, instead of actual costs, which total costs are calculated based on standard costs,

and then these totals are compared to actual accumulated costs. The difference is charged to a

variance account (Bragg, 2019). First-in first-out costing (FIFO). FIFO is method where costs are

included for any units of production that were started in the previous production period but not

completed, and for any production that is started in the current period (Bragg, 2019).

Activity Based Costing (ABC)

Activity-based costing is a costing method that assigns overhead and indirect costs to

related products and services (Kenton, 2020). This accounting method of costing looks at how the

costs, overhead activities, and manufactured products are interrelated with each other. The ABC

system of cost accounting is based on activities. Activities include events, units of work, or duties

with a specific goal (Kenton, 2020). Activities consume overhead resources and are considered

cost objects (Kenton, 2020). Examples of companies that will use activity-based costing are

manufacturing, healthcare, and construction (Wright, 2018).

 Comparison of Three Costing Methods

Job Costing Process Costing Activity Based Costing

Differences  Based on  Based on Continuity  Based on Activities

Customer Order of process involved

 Low Production  High production  High or low production

Volume volume volume

 Heterogenous  Homogenous  Homogenous/Heterogen

Products products ous products

 Job Cost sheet  Production cost is

used reported

Benefits  Best for Cost plus  Average cost can be  Accurate cost

contracts calculated calculation

 Comparison of  Easy allocation of  Exact profit can be

budgeted and expenses known

actual cost  Standard costing is  Correct decision

 Budgetary control followed making

system is used
Limitations  Expensive  Average cost is used  Costly to implement

 No standardization to value products  More technical work is

 More manual work  Cannot provide required

accurate estimate

when single process

is present and many

products
 After researching and comparing the three costing methods, the costing method that best

suits Wet Suit World is process costing method. As mentioned above, process costing method is

used when mass processing of identical goods occurs and the costs associated with individual

manufacturing units cannot be distinguished from each other (Bragg, 2019). In Wet Suit World,

the few things need to be considered. Firstly, the material is same for all units. Secondly, all suits

undergo the same production. Lastly, all suits undergo same quality inspection. All these points

can be satisfied with process costing method. My recommendation for Wet Suit World would be

to use process costing method.

 References

Accounting Coach. (n.d.) What is job order costing? Retrieved from:

https://www.accountingcoach.com/blog/what-is-job-order-costing.

Bragg, S. (2019, January 19). Process costing: Process cost accounting. AccountingTools.

https://www.accountingtools.com/articles/2017/5/14/process-costing-process-cost-

accounting.

Kenton, W. (2020, January 29). Activity-Based Costing (ABC). Investopedia.

https://www.investopedia.com/terms/a/abc.asp.

Wright, T. C. (2018, April 5). What Types of Businesses Do Activity-Based Costing? Your

Business. https://yourbusiness.azcentral.com/types-businesses-activitybased-costing-

28437.html.