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Methods of Costing

Name of the Student

Department

BUS 5110 Managerial Accounting

Name of professor

Due April 20, 2022

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Methods of Costing

a) Define the three costing methods.

Process costing refers to the accounting method that which companies mass-produce

identical products or units of output (Blokdyk, 2018). This method is common in large industries

which have the cost of producing each unit of output is similar hence no need to track cost for

any individual unit through the whole process of production.

Job order costing refers to a costing method that is used to determine the cost incurred in

manufacturing each product.

Activity-based costing is a method that identifies the organization's activities and assigns

them the cost of each product and service following the actual consumption by each of them.

b) Explain when each is most appropriately used.

Process costing is used by companies that have mass production of similar products. For

instance, reams of paper or bottles of soda have difficulties in determining their cost, and instead,

the cost is determined by process costing (Blokdyk, 2018).

Job order costing is normally used when the company produces different kinds of

products that are different and need their cost to be calculated. It involves labor, manufacturing,

and even direct materials.

Activity-based costing is used to assign more indirect costs to direct costs and is normally

used by large manufacturing sectors. The common activity drivers used in this costing are the

Direct labor hours used and machine hours used (Zeuner, 2012).
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c) Compare and contrast the methods, considering both benefits and shortfalls.

Process Costing - Process costing saves us time in allocating the costs to the products

because Equivalent units of production can be used. (Blokdyk, 2018). Given that it does not use

direct allocation of costs, costs errors may arise. The cost of production report is the document

used in process costing, this is composed of total units to account, equivalent units of production,

total costs to account, unit cost per EUP, and costs assignment.

Job order costing - one of the benefits of using a job order costing is that it is very

meticulous. You can individually judge every order based on their performances in generating

income making it a helpful guide to deciding which product should the company offer and

pursue in the long run (Ganiyu, 2018). Being meticulous also has its disadvantages as all the

materials need time to be tracked. Additional labor is also required during this process. The

document used in job order costing is a job cost sheet, in which you can see the material labor

and overhead used in the specific job.

Activity-based costing – This type of costing has costs allocations that are more reliable

since it is based on suitable cost drivers. Further, it helps the management to understand the

behavior of overhead costs and how it is related to products and services. On the other hand, the

implementation of ABC costing has been termed as costly (Baker, 2014). Additionally, there's no

constant cost driver that every company should use. Hence the manager has to understand the

business nature before he could pick an alternative from many.

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d) Provide a well-supported proposal for the cost method Wet Suit World should use.

In my opinion, the most appropriate costing that Wet Suit World should use is Job order

costing. Wet Suits World produces these wet suits based on orders of their customers whereby

they come in different sizes and shapes. Additionally, they also vary in thickness and other

customers have their color preferences. This will not be applicable for Process costing as Wet

suit world can't produce a lot of sizes. The aftermath of this is financial losses and loss of

customer base too. For these reasons, therefore, job order costing is more appealing to me than

any other costing method.

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References

Baker, J. J. (2014). Activity-based Costing and Activity-based Management for Health Care.

Jones & Bartlett Learning.

Blokdyk, G. (2018). Process Costing a Complete Guide. Emereo Pty Limited.

Ganiyu, I. A. (2018). Cost and Management Accounting Fundamentals: Management

Accounting 1. CreateSpace Independent Publishing Platform.

Zeuner, P. (2012). Activity-Based Costing. GRIN Verlag.