In this module, the discussion focuses on the similarities and differences among costing systems. You should be able to describe the systems and also identify which system would be most appropriate for a company and why that would be the case.

 

Describe the differences between job order costing, process costing, and Activity Based Costing (ABC). What are the advantages and disadvantages of each system? Imagine a company that you might be a manager for. Describe that company and what their major product or service would be. Then, tell which cost system would be best suited to that firm and why.

Answer:

Job-order costing - is a costing methodology used to assign manufacturing costs to individual units or output. This costing method is best used for companies generating heterogeneous products from which costs are significantly different from each other.

Process Costing - a costing technique that accumulates direct materials and proportionately allocates indirect costs. This costing technique is best used for companies generating mass homogeneous products. The costing is done by batch because the individual output cannot be differentiated from one another.

Activity-based Costing - a method that assigns cost per activity according to the actual consumption of individual output. This method is more accurate in assigning costs compared to traditional because it uses more specific cost drivers to accurately allocate the cost incurred. This is best used by companies generating products with a significant amount of overhead.

Similarities between the three costing methods:

The goal is to assign costs to products.

All three methods record each component of total manufacturing costs separately (materials, labor, and overhead).

Differences between the three costing methods:

Both job-order and process costing uses predetermined overhead while ABC costing uses cost drivers.

Types of products produced, job-order costing is for heterogeneous products, process costing is for homogeneous products, while ABC costing is for products that use a significant amount of overhead.

For example, I am a manager of a candy manufacturing company, I will be adopting process costing since it is the best method in producing a homogeneous product. The majority of the candy making procedure goes through a similar process, it only differs at some point like the adding of flavor and the like so it is practical to use such costing method for practicality and convenience.