Cost Information for decision making Essay
Cost Information for decision making
Two common costing systems used in business are traditionally cost accounting system (job costing, process costing and operating costing) and activity-based costing system (ABC). There are some similarities and differences between these systems. Regarding the similarities, both accumulate product costs throughout the production process and assign those costs to individual units of production. Additionally, product cost under two costing systems consists of direct materials, direct labor and manufacturing overhead.
In terms of differences, they are different in the way how the overhead costs are allocated. For conventional costing, it assigns manufacturing overhead based on a single volume based cost driver such as direct labour hours. In contrast, ABC approaches cost from the perspective that products do not cause costs. It requires activities which are the causes of all costs incurred so it allocates manufacturing overhead according to the activities needed to produce the products. Therefore, it highlights the existence of non value added activity which is not existed under traditional method. ABC also differs from conventional costing in the use of several cost pools when allocating the overhead costs.
For instance, traditional costing uses only one cost pool to distribute the overhead whereas there are many cost pools involved under ABC. Furthermore, ABC employs both volume-based and non-volume-based cost drivers while conventional costing utilizes only volume-based cost drivers. Another difference is that conventional approach complies with the GAAP so it can be used to satisfy conventional financial reporting requirements. On the other hand, accounting standard board does not accept ABC to prepare financial statements so it can be useful for internal management decision.
Under conventional system, there are similarities between job costing, process costing and operating costing. Firstly, they accumulate product costs throughout the production process and assign those costs to products. Secondly, these costing systems calculate the product costs which comprise direct material, direct labour and manufacturing overhead. Lastly, the cost flows for three systems is from raw material to work in process to finished goods and then to costs of goods sold.
These first two systems can be distinguished by the following differences. First, job costing system is used by the company which produces unique products or products based on customer orders. Conversely, process costing is for the firms which produce one or a few homogenous products and often have continuous mass production. Second, each individual product costs are traced easily under job costing while process costing makes no attempt to track individual product costs. Thirdly, under job costing, the transfer from one job to another does not take place whereas the production from one process is transferred to next one till the product is full completed under process costing. Next, process costing accumulates product costs in each production department throughout the period while job order costing accumulates product costs to specific units.
Operating costing for company which has a mix production system that produces in large quantities but then is customized the finished product. Therefore, operating costing is a combination of process costing and job costing. However, it differs from job and process costing which includes more than two types of cost pools in overhead allocation process. The cost pools are designed to match the separate processes that may be allocated to batches of products.
Comment about the quality of your work: According to the assessment criteria, my answer for the question should be marked 7. This is for the following reasons. Firstly, the answer is well-organized into five paragraphs which consist of differences between conventional costing and ABC costing. For instance, the first and second paragraphs demonstrate the similarities and differences between conventional costing and ABC. Apart from this, the answer also points out the similarities and differences between job costing, process costing and operating costing.