The chief aim of fabrication houses is to do net income. The net income on each merchandise sold is the difference between the merchandising monetary value of the merchandise and the entire cost of doing the merchandise. Cost therefore plays an of import function in the merchandise design procedure. To cipher the cost that incurred on the merchandise we use different Costing Techniques. Costing is non an easy undertaking because in the procedure of fabricating a merchandise many indirect stuffs and labor are used. To place these costs we use different bing techniques. Here we are traveling to discourse two methods of bing Job Costing and Process Costing.
Job Costing is to cipher the costs involved of a concern in fabricating goods. These costs are recorded in leger histories throughout the twelvemonth and are so shown in the concluding test balance before the preparing of the fabrication statement.
In a occupation bing system, costs are accumulated by occupation. Direct stuff and direct labour are easy tracked on a merchandise. In occupation costing we keep tracking these costs at their original value till the occupation is completed. Overhead is applied after the occupation is done. It is applied either by utilizing a rate based on direct labour hours or by utilizing an Activity Based Costing ( ABC ) cost driver. In either instance, one time overhead is added, the entire cost for the occupation can be determined. Upon completion, the costs are transferred out of Work in Process to Finished Goods ( Cost of Goods Sold for service industries )
Examples are
shoe manufacturing- ” requires different specification
garment manufacturing- ” orders differs significantly
vehicle fix shops- ” each fix requires different parts replacing and labour hours
Procedure costing is a method that hints and accumulates direct costs, and allocates indirect costs of a fabrication procedure. Costss are assigned to merchandises, normally in a big batch, which might include an full month ‘s production. At last, costs have to be allocated to single units of merchandise. It assigns mean costs to each unit, and is the opposite extreme of Job bing which attempts to mensurate single costs of production of each unit.
Procedure costing is a type of operation bing which is used to determine the cost of a merchandise at each procedure or phase of industry. It can be defined bing as “ The costing method applicable where goods or services result from a sequence of uninterrupted or insistent operations or procedures. Costss are averaged over the units produced during the period ” . Process costing is suited for industries bring forthing homogenous merchandises and where production is a uninterrupted flow. A procedure can be referred to as the sub-unit of an organisation specifically defined for cost aggregation intent.
Examples are
Car assembly line-all autos coming out are indistinguishable
Electronic assembly line where all merchandises is indistinguishable
Biscuit fabrication though has more than one merchandise line, each line is a separate, uninterrupted procedure bring forthing indistinguishable merchandises.
The differences between occupation order bing and procedure bing arise from two assorted grounds. The first is that the flow of units in a procedure bing system is more or less uninterrupted, and the 2nd is that these units are identical from one another. Under procedure bing it makes no sense to seek to place stuffs, labour, and overhead costs with a peculiar order from a client ( as we do with occupation order bing ) , since each order is merely one of many that are filled from a uninterrupted flow of virtually indistinguishable units from the production line. Under procedure costing, we accumulate costs by section instead than by order, assign these costs uniformly to all units that pass through the section during a period.
A farther difference between the two bing systems is that the occupation cost sheet is non used in procedure costing, since the focal point ofA a procedure costing is on sections. Alternatively of utilizing occupation cost sheet a production study is prepared for each section in which work is done on merchandises. The production study serves several maps. It provides a sum-up of figure of units traveling through a section during a period, and it besides provides a calculation of unit costs. In add-on it shows what costs were charged to the section and what temperament was made on these costs. The section production study is a cardinal papers in a procedure bing system.
Job Order Costing
Jobs are different in nature. Every occupation has different production demands and many occupations can be processed at the same clip.
Costss are occured by every single different occupation.
Job cost sheet is the papers, which shows from where the costs have come on the occupation.
Unit of measurement costs are computed by occupation on the occupation cost sheet.
Procedure Costing
A solo merchandise is produced on a regular basis or for a long period of clip. All units of merchandise are same.
Costss are accumulated on the merchandise by all the sections.
The section production study is the papers, which shows from which section costs have come and how much.
Unit of measurement costs are calculated by section on the section production study.
Decision:
Both bing techniques have their ain advantages and disadvantages. In occupation costing, costs are accumulated by occupation whereas in procedure bing it is done by a procedure. Job costing is cardinal to managerial accounting. Procedure costing is used when merchandises are more homogenous, whereas occupation costing can be done on heterogenous merchandises every bit good.
