Job Order Costing

JOB ORDER COSTING 1

JobOrder Costing

StudentsName

InstitutionAffiliation

Acosting method is a technique that helps in calculating the finalcost of a product. It involves the collection, recording,classification, analyzing, allocating and evaluation of courses ofaction based on control of costs (Kinney &amp Raiborn 2013). Thisdata is significant since it is useful in accounting, financialreporting, and determining the pricing of the products. Variouscosting methods are process, job and activity based. The variouscosting methods include First in First out (FIFO), Last in First out(LIFO), average cost, standards cost, and actual cost. The choice ofa costing method in any organization depends on the organization`smode of operation and their activities. This paper will analyze theprocess based First-In-First-Out costing method (FIFO).

Underthe first-in-first-out costing method of process costing, anorganization transfers the incurred cost from one department to thenext until the costs are ultimately transferred to the finished goodsas illustrated by Kinney &amp Raiborn (2013). This process of costtransfer follows the order in which those products or goods enteredthe departments. This means that costs coming first are transferredfirst hence the name. The types of organizations that should use thiskind of costing method include small businesses and organizationsthat deal with perishable goods. Small organizations should preferthis type of method since it is simpler while organizations dealingwith perishable goods should use this method as it minimizes losses.Companies that export their products are also encouraged to use theFIFO costing method since it is recognized internationally.

Thefirst-in-first-out costing method is different from the other costingmethods in that the assumed flow of the calculated costs correspondsto the physical flow of the goods. This is advantageous since itmakes this method easy to apply and manipulation of income isavoided. This method is also advantageous to use because the amountof inventory in the balance sheet is more likely to be used toapproximate current market value (Kinney &amp Raiborn 2013).

Scenario

Supposingwe have a company with the following information in the month ofOctober:

Details

Units

Costs

Oct 1

Bal b/f

68

$1

Oct 5

Purchase

140

$1

Oct 9

Sale

94

$1

Oct 11

Purchase

40

$1

Oct 16

Purchase

78

$1

Oct 20

Sale

116

$1

Oct 29

Sale

62

$2

Whencalculating the cost of goods for the month of October using the FIFOmethod, the solution will be:

Purchaseof Oct 1 $ 68 +

Purchaseof Oct 5 $140 +

Purchaseof Oct 11 $40 +

Purchaseof Oct 16 $78 +

Totalcost of goods= $ 326

Basedon the above scenario, the company can make management decisions bycomparing their cost of goods to their accrued revenues from sales.If there is need to realize more profits, they can take variousmeasures to reduce the costs associated with those goods or topromote sales. Some of these measures can include: increasing moresales of their products to increase revenue, increasing the price oftheir goods or purchasing fewer quantities of those goods. The costof goods can also be reduced by looking for new and cheaper suppliersor reducing the associated costs like transport costs, storage costs,taxes and eliminating middle-men.

CostAccounting Systems

Kinney&amp Raiborn (2013) explained these two cost accounting systems. Jobcosting system is a system where manufacturing costs are assigned toindividual products or batches of products. This system is used wherethe products manufactured differ from each other sufficiently. Itinvolves assigning overhead costs such as depreciation, labor, directmaterials, quality control, warranty, etc. and then deducting thisestimate from the cost of sales. This results in the apparentprofits. On the other hand, process costing system involvescollecting and assigning manufacturing cost to the produced units.The major differences between these two costing systems are:

1.Process accounting is used where the products are homogeneouswhile job costing system applies where the products are distinct fromeach other.

2.Process accounting system is used where the production runs arelarge while job costing system is used where the production runs arevery small.

Manycompanies use both the process costing and the job costing systembecause most of them produce similar goods, with a few that haveunique features.

Activity-basedCosting System (ABC)

Accordingto Kinney &amp Raiborn (2013), this type of costing system is amethodology that identifies the activities involved in anorganization and assigns the costs to each activity according toresources and actual consumption by each activity. On the other hand,activity-based management (ABM) is a method that uses activity-basedcosting to carry out an analysis which will then influence thestrategic and operational decision-making process. Both the ABC andABM are management tools that help in improving decision making andbusiness performance but differ in their functionality. ABM`s primaryfocus is the managing activities and business processes while ABCaims at improving the costing and hence can be regarded as a subsetof ABM.

Mostbusinesses and organizations are now adopting the Activity BasedCosting (ABC) system. This is because it is more accurate in costingvarious aspects of an organization. It is also efficient inaccounting for overhead expenses, easier to understand since itutilizes unit cost rather than total cost. The system also mirrorshow work is done and facilitates benchmarking and performancemanagement.

Conclusion

Costaccounting is an important aspect in any organization as it helps inthe decision making process. What matters most is not the method andsystem to use but the significance of the results to theorganization. The most essential aspect of costing method ispersistence in using one method to ensure consistency and efficiencyof the results. This consistency helps in decision making by ensuringthat results in different financial periods are easily comparable.

References

Kinney,M. R., &amp Raiborn, C. A. (2013). Costaccounting: Foundations and evolutions.