Week 6 Assignment – Selecting a Costing Method

Rebecca Miller

Cost Accounting – ACC560

Dr. Jones Olajide

May 16, 2022

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 Compare the three costing systems in a way that highlights differences in how they would

impact the company's operation and finances.

In activity-based costing, production costs are determined based on the activities

performed. Overhead costs are delivered among production-related activities. (1) The benefits

of ABC are that profitability measures are better, decision making is also improved, process

improvement, enhanced planning, and classification of the cost of unused capacity. These

benefits significantly provide the business's competitiveness by assisting them in making better

decisions and executing its strategy. (2) Even with these benefits, there come disadvantages. As

a percentage of the total cost of the products or services, overhead is only a small component.

It may not be reasonable to allocate all the overhead to a particular event. Profits may not

continually recoup additional costs. (1)

Job costing has a few primary goals. Understanding each job's profit or loss is one of the

goals. Job costing analyzes every element of a specific project so you can track its profitability.

Comparing estimates is also part of the process. Finally, the goal is to find inefficiencies and

high costs within a project. It is possible to address future projects by automating repetitive

tasks and efficiently allocating employee resources. Pricing a product, project, or service can be

one of the most critical decisions a company makes. Reach gross profit margin goals and it's one

of the most crucial accounting practices for small businesses. Accurate job costing can improve

profitability, help you better manage employee scheduling, and be a key component of prompt

financial reporting. (3)

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 The practice of process costing entails assigning a cost to a collection of products or

project outputs generated, usually within a month, and using that information to calculate a

unit cost. Typically, companies that mass-produce many identical or nearly identical products at

once use process costing. A job costing process involves a company quantifying all materials,

labor, and overhead costs necessary to produce a single job output, such as the previously

mentioned construction project or a limited-run product. Businesses must include all operating

costs for consistent, large-scale production of similar products over time, including white-label

rubber gaskets, paper straws, and smartphones. (3)

Justify your choice of an appropriate costing system for the company that includes an

explanation of the criteria that you considered and clear evidence of why it is chosen over the

other methods.

The appropriate costing system I choose is job costing. During job costing, materials,

labor, and overhead are added to a production process to create an item(s) for sale, MTS for

later sale, or use in future production. These costs are accumulated when transactions occur for

purchases/assignments of inventory to work in progress, specific labor allocated at an

employee rate, and the amount of manufacturing and administrative overhead assigned to the

product. Typically, this type of costing is used in Make-To-Order (MTO) production

environments. The benefit of job costing is that it allows manufacturers to track the exact cost

to build a product or products and apply a markup to achieve a desired profit margin for the

product (albeit that success is rare). A manufacturer can efficiently allocate direct costs to a

product in this environment. They can quote and price accurately if they have reasonable

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control over their variable and overhead costs. Job costing has the disadvantage of requiring a

large amount of transaction-level activity to track all the different expenses that are constantly

applied to the production process to arrive at accurate costing for a product. In addition,

precise management and updating production costs require sophisticated software

applications. Furthermore, overhead absorption is a challenging issue. To accurately price

products coming out of production, an MTO manufacturer needs an environment to track real-

time costs and establish/manipulate overhead absorption routinely without much manual

intervention. (4)

Identify then analyze the most significant impact of implementing your costing system choice

on company finances.

With job costing, you can provide your customers with more accurate estimates. When

you're in an industry like construction, it's hard to provide accurate forecasts because every job

is different. On the other hand, job costing allows you to budget for jobs more accurately,

providing better estimates to your customers. A job's total cost is determined by adding the

direct materials, direct labor, and overhead costs. These costs can also be broken down into

unit costs. You can calculate your profit and loss for a specific period based on these figures.

Deduct your expenditures from your income from the same period to arrive at this formula.

When the number is positive, the firm makes a profit, and when it is negative, it loses money.

(5)

Analyze the most significant impact of implementing your costing system choice on company

operations.

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 In a job costing process, costs such as recycling paper are accounted for. Price per job

calculates the cost associated with a task, project, or invoice in managerial accounting. By

tracking these costs, businesses can learn valuable information to help them become

increasingly profitable. Tracking job costs, however, can take much time. A reconciliation may

be required for receipts, materials, inventories, labor hours, etc. A job costing system that

tracks costs automatically can make this process more efficient. This system can even calculate

final costs. The company will also gain other benefits in addition to the information gained.

Businesses have various overhead costs, so managers can track their margins by calculating the

cost per job. They will be able to see if the job is coming in under or over budget using the job

costing system. According to the financials, managers can make better business decisions

regarding managing the completion of a job. Job costing simplifies the reimbursement process

if your company works with clients or customers who reimburse. An overhead recovery rate

can be predetermined when using a job costing system. As a result, job costing allows you to

determine the basis for budgets at any given moment. You can make informed predictions

about your overhead recovery rates by having access to this information. Cash flow problems

sufferers will be grateful for this. Despite this, job costing still has some advantages that few

consider. Additionally, executives can choose how to invest their capital most efficiently since

reimbursements without bad credit loans increase capital. If executives can figure out which

jobs are most profitable, they will be more likely to invest wisely in their business. Improving

cash flow could be realized due to strategic investments made by the company's higher-level

decision-makers. Costs can be inputted into most free accounting software programs. In

contrast, an automated job costing system will automatically assign expenses to specific jobs.

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By automating this process which ties into the finance department, employees and managers

will not need to allocate costs to each position before sending it to accounting. The company

saves money and time by eliminating unnecessary data processing when an automated system

is in place. (6)

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 References

1. CFA Journal. N/D. What is Activity-Based Costing and How Does It Work (Explained).

https://www.cfajournal.org/activity-based-costing/

2. Blocher, E., Stout, D., Juras, P., & Smith, S. 2019. Cost Management: A Strategic

Emphasis Eighth Edition

3. Clancey, J. May 24, 2021. Job Costing Defined: A Complete Guide.

https://www.netsuite.com/portal/resource/articles/accounting/job-costing.shtml

4. LillyWorks. 2022. Best Costing Methods for Manufacturers.

https://www.lillyworks.com/blog/best-costing-methods-for-manufacturers/?

fbclid=IwAR1uD0cypIAj6e7OmjkqRbbwdZD2frVgh4ndhpuGJN7t-Yp4s8wq-UvqA8M

5. Seppala, E. September 13, 2019. What is Job Costing? And Does Your Business Need It?

https://www.merchantmaverick.com/job-costing/

6. Business First Family. December 10, 2021. 8 Ways the Best Job Costing System Impacts

Business Operations. https://businessfirstfamily.com/top-job-costing-system-benefits-

to-companies/#:~:text=While%20business%20have%20various%20overhead%20costs

%2C%20calculating%20the,completion%20of%20a%20job%20according%20to%20the

%20financials.