The Three Costing Methods

Department of MBA, The University of the People

BUS 5110 - Managerial Accounting

Dr. Rebecca Attah

November 24, 2021

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The Three Costing Methods

Costs are accumulated and accounted for by different types of businesses through three cost
methods.

Job order costing is when assigning the total manufacturing cost (direct materials, direct labour,
manufacturing overhead) to each job or batch. The company provides outputs based on the
individual needs or specifications of the customers. The cost is ascertained separately for each
job as every work order differs from customer to customer. The purpose of job costing is to
ascertain the profit or loss made on each job. (Job Costing: Meaning, Objectives and Procedure |
Cost Accounting) A further cost of a job is compared with the estimated cost to indicate whether
the estimation was defective, or the actual cost incurred is excessive. Such an analysis helps in
taking remedial action to improve efficiency also facilitate the revision of estimates. (Job
Costing: Meaning, Objectives and Procedure | Cost Accounting) Since job order costing is used
for producing outputs based on customers' specifications on orders, it is most suitable for
manufacturing companies that receive orders or batches of customized products such as furniture
making, construction, architecture, painting.

Process costing - is used by companies with continuous mass production of similar products
through several processes or departments. Outputs are produced in large quantities and are
identical or homogeneous. Each department has its job. Process costing saves us time in
allocating the costs to the products because statistical calculations can be used (Called the
Equivalent units of production). Since it does not use direct allocation of costs, cost errors may
arise. Cost of production report is the document used in process costing; this is composed of total
units to account, equivalent units of production/EUP, total costs to account, unit cost per EUP
and costs assignment. Thus, it is most suitable for: paint manufacturing, petroleum products,
beverages.

Activity-based costing - allocates overhead to products based on the performance of activities,

most often multi-stage activity cost pools. In short, They allocate overhead based on each
product's consumption. Cost pool or pool rate can be computed as overhead costs divided by
activity drivers. These costs will be multiplied by the actual activity usage to get the applied
overhead. The manufacturing sector uses activity-based costing to allocate the costs for each
product accurately. The everyday activity drivers used in this costing is the direct labour hours
used and machine hours used. So, it is suitable for: builders.

On the one hand, using a Job order costing is that it is very accurate. So business owners can
individually judge every order based on their performances in generating income, a helpful guide
to decide which product should the company offer and pursue in the long run. Being accurate
also brings shortfall.
On the other hand, activity-based costing - cost allocations are more reliable since they are based
on suitable cost drivers. Moreover, it helps the management understand the behaviour of
overhead costs and their relationship to products or services. On the other side, the
implementation of ABC costing is very costly. Also, there is no constant cost driver that every
company should use.
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The Three Costing Methods

In my opinion, the best costing that Wet Suit World should use is Job order costing. Wet suit
World produces these wet suits based on their customers' orders (which vary through sizes; small
to 3x extra-large and thickness). Process costing is not applicable since Wet suit world cannot
just produce many sizes. This may result in losses and huge costs. Also, people do not practice or
play water sports every day (snorkelling and scuba diving). It has a particular season (which is
summer) that makes the wet suits more marketable. Therefore, job order costing is more
appealing.

In conclusion, the three costs incurred in producing an item are direct material, direct labour, and
manufacturing overhead- process costing is the system of accumulating costs within each
department for large-volume, mass-produced units. This process often costs groups direct labour
and manufacturing overhead as conversion costs. In comparison, process costing determines the
cost per unit through the use of equivalent units or the number of units that would have been
produced if production was sequential instead of in batches. While activity-based costing -
allocates overhead to products based on the performance of activities.
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The Three Costing Methods

References:

Accounting Hub. (n.d.). Accounting. Boundless.com CC BY-SA 4.0. Chapter 3 Retrieved from:

http://oer2go.org/mods/en-boundless/www.boundless.com/accounting/index.html

Heisinger, K., & Hoyle, J. B. (n.d.). Accounting for Managers. Chapter 1.Retrieved from:

https://2012books.lardbucket.org/books/accounting-for-managers/s05-02-planning-and-control-

functions.html

Job Costing: Meaning, Objectives and Procedure | Cost Accounting (n.d.). accountingnotes.net.
Retrieved from:

https://www.accountingnotes.net/cost-accounting/job-costing/job-costing-meaning-objectives-
and-procedure-cost-accounting/15054