2.2 The three costing methods

• Definition the three costing methods.

In a managerial accounting. There exist three kinds of costing methods – job order costing, process costing and activity-based costing. Job order costing is a costing method by cost determination of manufacturing each product (Kesavan, 2020). The process costing is a method of costing by costing the process unlike the job costing which costs each job separately. The process /input costing can also be defined as,

Cost per unit = cost of inputs / expected output in units = total process cost /                                            production unit

 

(A.  C. C. A, n.d.)

The third method is activity based costing. It is a method of costing which assigns indirect and operational costs to the related services and product. This method acknowledges the existence of relation between manufactured products, operational activities and costs, assigning indirect cost to product less based on random choice than conventional/traditional costing method. However, some non-direct cost such as the salaries of the office staff and management are not easy to assign to a product (Kenton, 2021).  

• Explanation when each is most appropriately used.

The adoption of job order method happens once the manufacturers produce different one by one products and they need to do the calculation of the cost of independent job performance. Moreover, it is also used to determine if a job is really profitable or not (Kesavan, 2020). In contrast, process costing happens when a manufacturing company is established with massive production of almost identical products having the same individual output unit costs. This assume that the cost of every produced product is the same as that of every other product (Bragg, 2021). The third one is appropriately used when we fix a service or product price, identify activities, products, process, all departments which are not able to efficiently operate, achieve the control of cost at departmental or product level, identify unneeded cost which could be completely removed, identify profitable departments, products or activities having greater needs of allocated resources  (Benaroya, 2019).             

• Comparing and contrasting the methods, considering both advantages and disadvantages.

In comparison, the advantage of the job costing method is that it can allow a company to be able to reliably estimate the spent labor, materials and operating costs throughout a job performance, while it’s disadvantages are more paper works needed, difficulties of measurement, more internal conflicts, operational costs which are based on estimation, and uncontrolled operational costs (Anonimous, 2021). Talking about the process cost, it can be periodically determined in a short time interval, less expensive and simple, getting evaluational performance of every process, getting more accurate costs with easy allocation of the expanses to the process, and easiness to quote the price with standardized process, while the disadvantages of the process costs are at the final accounting period the obtained costs are only historical and can’t be used for effective control, progressing work must be ascertained to calculate the continuous process cost with the fact that the continuous work done by approximation introducing total cost inaccuracy, not reliable due to approximation, having errors of average cost calculation, and more difficult average cost calculation in cases if the companies manufactured more than one type of products  and it’s necessary to divide the cost elements (Ojha, 2019). In summary, the advantages of activity based costing are more accurate service or product costing, which leads to more accurate decision in price (CGMA, 2013), and the disadvantages are  time consuming in data collection and preparation, more costs given in accumulating and analyzing information, normal reports of accounting are not always ready to be data source, etc (Woodruff,2019)     

• The proposal for the cost method Wet Suit World should use.

The wet suit word company mentioned the same materials of all suits but can vary in the thickness. Moreover the quality inspection and production processes are the same. Based on the available information of the above three costing methods. The process costing is relatively more suitable for calculating the cost of the fabrication and manufacturing of the suit since it confirms the suitability of the process costing that is well used for massive production of almost identical wet suit having the same individual output unit costs with the assumption that the cost of every produced wet suit is the same as that of every other wet suit (Bragg, 2021) with different measures of thickness. Or the company can just variance the price using process costing but the price can be higher for higher thickness of the suit product.

 

References

Kesavan, S. (2020, June 5). What is job order costing? - zoho inventory. Essential Business Guides. Retrieved September 15, 2021, from https://www.zoho.com/inventory/guides/what-is-job-order-costing.html.

Anonimous. (2021). MSG management study guide. Advantages of Job order Costing. Retrieved September 15, 2021, from https://www.managementstudyguide.com/advantages-of-job-order-costing.htm.

A. C. C. A. (n.d.). Process costing. ACCA. Retrieved September 15, 2021, from https://www.accaglobal.com/vn/en/student/exam-support-resources/fundamentals-exams-study-resources/f2/technical-articles/process-costing.html.

Bragg, S. (2021, August 10). Process costing: Process cost accounting. AccountingTools. Retrieved September 15, 2021, from https://www.accountingtools.com/articles/2017/5/14/process-costing-process-cost-accounting.

Ojha, C. A. D. (2019). Advantages & Disadvantages of Process Costing. Civil Service Gurukul One Stop Solution For UPSC Preparation. Retrieved 2020, from https://www.civilservicegurukul.com/advantages-disadvantages-of-process-costing/.

Kenton, W. (2021, July 28). Activity-Based costing (ABC). Investopedia. Retrieved September 15, 2021, from https://www.investopedia.com/terms/a/abc.asp.

Benaroya, R. (2019, July 18). When is Activity-Based Costing needed? Stride Services. Retrieved September 15, 2021, from https://stride.services/blog/when-is-activity-based-costing-needed/.

CGMA. (2013, June 11). Activity-based costing (abc). CGMA. Retrieved September 16, 2021, from https://www.cgma.org/resources/tools/essential-tools/activity-based-costing.html.

Woodruff, J. (2019, January 25). The disadvantages & advantages of activity-based costing. Small Business - Chron.com. Retrieved September 16, 2021, from https://smallbusiness.chron.com/disadvantages-advantages-activitybased-costing-45096.html.