University of the People

Department of MBA

BUS 5110: Managerial Accounting

Dr. Zelealem Tadesse

Nov ,21 2021

Introduction.

Costing is an important element of business operation. Cost accounting is the sum of the

procedures of recognizing the types of costs based on cost-related documents, allocating the

costs to their relevant places of cost, calculating the real cost of the goods or services produced

recording, reporting, and analyzing (Altu, 1996). Cost accounting is used in industrial and

service businesses to achieve the goals as follows (Bursal and Ercan, 2002). Its used in

calculation of the prices of commodities and services provide, Controlling of business processes,

Providing cost of products needed in short and long run useful in decision making.

Job Order costing. When products are manufactured in response to specific customer orders,

the job order cost system is used (J. Lewis 1984). This is a costing method used when a job/cost

unit is relatively small in size, is undertaken to meet the customer's specifications, and is
completed in a relatively short period of time: Each job moves through the operations as a

distinct unit on a continuous basis. Kasneb (2019)

Process costing. Kohler defines process costing as "a method of accounting in which costs are

charged to processes or operations and averaged over units produced; it is used primarily where a

finished product is the result of a more or less continuous operation, such as in paper mills,

refineries, canneries, and chemical plants; distinguished from job costing, in which costs are

assigned to specific orders, lots, or units." Kohler(1970). This method is appropriate when a

product/service is the result of continuous or repetitive operations or processes. Kohler(1970).

Activity Based Costing. ABC is a costing method that recognizes that costs are incurred as a

result of the activities that occur within the organization, and for each activity, a cost driver can

be identified. Costs that are driven or incurred by the same cost drivers are grouped together into

cost pools, and the cost drivers are then used as a basis for charging the cost of each activity in

the product. Kasneb (2019). For the past two decades, the ABC method has been widely

successful, with numerous cases of implementation documented. In practice, however, many

businesses have abandoned ABC, at least on a large scale (Gosselin 2007).

Costs Activity Process Costing Job Costing

Methods Based

Classification Costing

Based on Based on the Based on customer

 Activities progressive and order specification

undertaken continuity

Both High and High Production Low Production

Differences
low volume Volume

production

volume

Unit cost of a Product cost is Pricing is done by

product is calculated on clients job/order

calculated on department

activity

Traces cost on Trace the costs to Traces costs to a

the activity the production specific job/order

department or
Benefits
batch

Accurate cost Average cost can Suitable for cost

calculation be easily contractors and

determined Consultant
Shortfalls
Its costly and Costs vary and may Cost vary from

not easily not be applicable in one contractor to

implementable all every another

organization
 Technical This method does More Manual

work involved not give any work involved.

precise estimate if

single process and

different products

are made

Conclusion.

All the above costing methods are applicable in specific production industries in costing of

products and services, however every method has its pros and cons and its applicability differs

from one industry to the other. From the case study of Wet Suit World the method that I can

propose to be used is process costing. This method is applicable since production of the suits is

standardized and the cost of producing suits can be determined and distributed and spread over

the units of suits produced also products are manufactured consecutively and so they lose their

identity. Process costing is applicable in industry where mass production of items involved hence

applicable in this case.

References.

The importance of cost calculation method in the ... - HRMARS. (n.d.). Retrieved November 21,

2021, from

https://hrmars.com/papers_submitted/766/Article_05_The_Importance_of_Cost_Calculatio

n_Method1.pdf.

Inventory planning | springer for Research & Development. (n.d.). Retrieved November 21,

2021, from https://rd.springer.com/chapter/10.1007/978-1-349-17691-5_7.

Process costing - mail.srcc.edu. (n.d.). Retrieved November 21, 2021, from

https://mail.srcc.edu/sites/default/files/Process%20Costing%20(1).pdf.

Advanced Management Accounting - KASNEB notes. (n.d.). Retrieved November 20, 2021, from

https://kasnebnotes.co.ke/wp-content/uploads/2019/04/Advanced-Management-

Accounting-Strathmore-university-notes-and-Revision-kit.pdf.