Job Order Costing and Process Costing - Essay Example

Articles Related to Managerial Accounting Articles Related to Management Accounting Job Order Costing and Process Costing By Faizan Khan Accounting Articles Published: May 29, 2012 Topics: Job order costing, process costing Summary: This article primarily focuses on the fundamental aspects of job costing and process costing. It applies the example of a garage, showing that a job ticket is written specifically for the job to be carried out on a customer’s car. The charge imposed on the work includes not only the mechanic’s payment, but also other expenses like utilities, rent, equipment use, warehousing, insurance and maintenance, among others. These extra costs make up the overhead charge. The latter is not stated separately. This cost encompasses even the gross profit to be made by the auto-repair shop. The cumulative cost, therefore, constitutes the job cost charged to the customer. The article successfully illustrates that a job order costing approach is utilized when the job in question is distinctive from other jobs or product batches. Just as learnt in the management accounting class, cost accounting is relatively simple in job order costing. This is because the cost of materials and labor are integrated on one job ticket. Further, other overhead costs are included in the total amount of money charged to a customer. The article clearly distinguishes job costing from process costing, by showing that their difference depends on the product being availed to a customer, hence the kind of production procedure followed. I therefore learned that while process costing involves charging costs incurred in the course of production, job costing involves charging a specific job. I also learned that, cost assignment strategies and record keeping in job order costing, have higher complexity than in process costing. This is especially the case, if there are multiple services or products being provided. Complexity is increased by the fact that different services or products result in different costs. This means that for high efficacy in job costing, a company must maintain detailed cost records for every job or product. Cost-Volume-Profit analysis for profitability management By James Leong Asia Professional Speakers.Org Published: 2013 Topics: Cost behaviour, cost management, Cost-Volume-Profit (CVP) analysis Summary: This article recognizes the fact that in any business, there is a possibility of making profits, suffering losses or simply breaking even. The F&B establishment used as an example adopts a strategy of providing high quality soup at a fair price.  This means that the variable costs incurred are high because of using ingredients of high quality, yet the selling price stays at an average level. As a result, the contribution margin remains equally average. Therefore, fixed expenses and generate profit, the business compensates low margin with high sales volume. This involves making sure that its outlets are located in places with high customer traffic. The strategy has enabled the business to breakeven and to generate profit for about seven years continually. The article shows that different businesses adopt different cost behaviour, depending on their environment. It also shows that cost management is vital, if a business is to make profits, or at least break even in its operations. This calls for creation of a Cost-Volume-Profit model, suitable to the establishment. For example, a business with falling demand and high fixed costs can adopt several strategies. One could be increasing volume, by lowering price. I learned this in economics, where the lower the price, the higher the demand will be, hence the higher the sales. Overall, it is evident from the article that a business should continually review its production processes or volume, and streamline these with sales. This would help reduce or completely eliminate waste. I also learned that it could be possible to eliminate a whole category of costs including premises or personnel. Such a measure would reduce costs, enhance revenue or enable a business to focus on more valuable activities. Standard Costing By D. Victor Published: April 9, 2010 Inside Business Topics: Standard Costing and variance, budgetary planning Summary: The article addresses standard costing and steps that should be followed in its effective attainment. Standard costing is defined as a control mechanism that draws compares standard revenues and costs with actual results. This is done to establish variances and further enhance business performance. The definition, therefore, suggests that standard cost is equal to planned or projected cost. First, a company must establish an estimate of its services or products. Secondly, it must collect information on actual costs. Finally, the business must calculate the variance or difference between the planned and actual costs. Standard costing is vital, if a business is to successfully identify the resources it requires to produce adequate products or services. The planned cost applied standard costing serves as a budgeted cost. This makes it possible for a business to estimate its production capacity. Standard costs apply to production overhead, direct labor and direct materials. The primary purpose of standard costing is to compare expected outcomes with actual outcomes. This brings about the concept of variance. For instance, if the actual cost is relatively lower than planned cost, this could show budgeting efficiency of a business. However this variance could be due to improper resource use, like use of cheaper and lower quality inputs than the recommended resources. If this is the case, necessary measures should be taken to rectify the situation. Use of standard costing appears simple, but it requires comprehensive implementation measures. For example, there should be an agreement within a firm, on the standards to use. Executive staff should be fully informed on the possible impact of chosen standards on employees’ behaviour and motivation. Standard costing aids significantly with enhanced operation efficiency, budgeting, stock valuation, and resource control, among other advantages. Activity-based costing By Robert Kaplan Published: Jun 29, 2009 The Economist Topics: Cost management, Activity-based costing Summary: The article analyzes activities in a power company, and shows how each can be assigned a cost for overall cost management. An example of an activity cost incurred is in the negotiation process with suppliers. The other is in updating database, in order to establish the suppliers input, and necessary output for clients. This implies that other overhead costs have to be distributed to these activities, as well as, to the process of handling complaints and in issuance of purchase orders. These costs do not represent the direct labour costs, but the cost associated with diverse operations. The article clearly illustrates activity based costing (ABC), by showing that it entails unit identification, followed by assignment of direct and overhead costs to that particular unit. It also involves selecting an allocation base for the overhead categories to be used in determining the overhead rates. In this technique, homogenous cost pools are set, in order to allocate overhead costs. This is done by accounting for activities necessary to produce a unit of production. Activities such as the purchase of raw materials and machinery set up and assembly of different parts are crucial in the production process. The cost involved in the administration of these activities needs to be distributed to the products, based on how each product contributes to the activity. It is apparent from the article that, implementing activity-based costing systems can be instrumental in cost management. This is because, such a system would aid in monitoring the costs in every production activity and finding ways to reduce them. Activity-based costing is, therefore, a requirement for enhancing business procedures and reconfiguring an operation programme. Rep. Ryan unveils House GOP plan to balance budget, cut $5T in spending By Associated Press Published: April 1, 2014 FoxNews.com Topics: Budget planning Summary: The article focuses on the budgetary measures proposed by Paul Ryan, who is the chairman of the House Budget Committee (HBC). The individual proposes imposition of monetary reductions to food stamps. He also suggests significant changes to healthcare programs sponsored by the government, in an effort to help the working class and underprivileged in society. The HBC chairman’s plan also proposes reduction of education grants for students from low income families. The other proposed budgetary measure entails increasing benefits for retirees. The latter is projected to take place in the short-run. The overall plan aims at balancing the budget, while creating jobs. It is primarily based on the basic fact that the government cannot continue spending money that it does not actually have. Even though the article is oriented toward politics or government financial planning, it introduces the basic aspects of budget planning. Key among these aspects is the need for an establishment to properly plan its spending. Allotment of money to different responsibilities should not exceed the existent resources. Further, budgeting does not entirely involve cutting down of costs, but also allocating money to obligations that are likely to add the most value to a company. A firm must also strive to cut down expenses that are deemed unnecessary. This will ensure that it remains within the estimated financial limits, while leaving some revenue to spare. Remnant revenue can be allotted to other crucial activities, thus balancing out the firm’s finances and avoiding deficits. Tapping the Full Potential of ABC By Joseph Ness and Thomas Cucuzza Published: July 1995 Harvard Business Review Topic: Activity Based Costing Summary: The article seeks to convey the idea that ABC is capable of being more than just an accounting technique. This means that ABC can show more than just the amount of money that individual products or processes are generating or losing. Extra benefits of ABC can be attained by integrating the technique into vital management systems. Such a step would ensure that ABC serves as a potent tool for constantly reevaluating and improving not just services and products, but also a company’s market strategies and processes. Using ABC in this manner would require managing personnel in an equally transformative manner. Comprehensive use of ABC requires a company to educate workers at all ranks about the mechanics and principles associated with this accounting technique. Employees should fully understand the objectives that a firm seeks to achieve using ABC. They must also be trained on ABC usage in their respective jobs. This should involve extensively convincing workers that ABC can enhance the success of an organization. Finally, a firm should redesign other accounts management systems, in order to make sure that workers fully integrate ABC into their ordinary practices. Adoption of ABC in a comprehensive manner would enable a firm to cope with a wide array of issues. For instance, managers can easily determine the cost to allocate to a specific process or product. It also becomes easy to identify the non-valuable activities that add to current costs, thus cutting down on them. Managers can also use ABC to reduce costs by eliminating unprofitable distribution channels, customers, or products. ABC could also b instrumental in redesigning production processes to eliminate unnecessary costs. United to Drop Cleveland Hub as $2 Billion in Savings Sought (1) By Hugh Son and Mary Schlangenstein Published: February 3, 2014 Bloomberg News Topics: Decentralized performance, cost management Summary: The article features United Airlines’ attempt to reduce and regulate its costs. This airline company is the second largest in the world. Its principal operation areas include New York, Chicago and Los Angeles. The airline offers it flight services throughout the US, London and Tokyo, among other countries. However, due to relatively high fixed costs, United Airlines intends to get rid of more than 430 workers responsible for airport operations. This involves giving up Cleveland, Ohio, as its main hub of operation. The decision was taken following continued unprofitability of the hub and consequent difficulty for the company to adjust its expenses, following revenue fluxes. The decentralization of operations, to avoid incurrence of unnecessary costs is projected to save United about 2 billion US dollars. This shows that distribution of costs over different areas has the potential of saving a company a significant amount of money. Decentralization is also highly likely to contribute to a better balance between fixed and variable costs, thus contributing toward better management of costs. Incremental analysis of the reengineering of an outpatient billing process: an empirical study in a public hospital. By Kuan-Yu Chu and Chunmin Huang Published: June 13, 2013 BMC Health Services Research Topics: Incremental analysis for short term decision making Summary: The article presents a detailed study on the incremental analysis of redesigning the billing process of an outpatient program in a hospital. The study sought to determine whether use of a smartcard system would incur lower costs and enhance efficiency, compared to the traditional billing method. The study conclusively showed that the smartcard billing system incurred higher unit costs than the traditional method, due to the extra business tax and service fees. However, the system reduced the amount of time spent by patients, while waiting for clearance or admission. This served as proof that the smartcard billing system is highly convenient for both patients and service providers. As a result of the cumulative time saved, the incremental cost incurred would be relatively close to hospital’s breaking even point. The described incremental analysis effectively showed that the conventional cash billing system is not only time consuming, but also requires patients to produce large amounts of money. This shows that the establishment can make a short-term decision of adopting the smartcard billing system. The latter provides an immediate payment service and offers greater convenience, as well as, security. Overall, the incremental analysis technique can be used to assist a firm’s management team in making crucial decisions. The manager assesses the impact of changes, whether their margins are small or large. It is related to changes per unit of production analysis. This technique is crucial since it is widely applicable in almost all business setups. It is most applicable in the short term decision making since the probability of production volume affecting fixed costs is low. References Associated Press. (2014, April 1). Rep. Ryan unveils House GOP plan to balance budget, cut $5T in spending. Fox News. Retrieved from http://www.foxnews.com/politics/2014/04/01/rep-ryan-unveils-house-gop-budget-to-slash-51-trillion-in-federal-spending/ Chu, K. & Huang, C. (2013, June 13). Incremental analysis of the reengineering of an outpatient billing process: an empirical study in a public hospital. BMC Health Services Research. Retrieved from http://www.biomedcentral.com/1472-6963/13/215 Kaplan, R. (2009, June 29). Activity Based Costing. The Economist. Retrieved from http://www.economist.com/node/13933812 Khan, F. (2012, May 29). Job Order Costing and Process Costing. Accounting Articles. Retrieved from http://accountarticle.wordpress.com/2012/05/29/job-order-costing-and-process-costing/ Leong, J. (2013). Cost-Volume-Profit analysis for profitability management. Asia Professional Speakers. Retrieved from http://www.asiaspeakers.org/members-articles/cost-volume-profit-analysis-for-profitability-management-by-james-leong.html Ness, J, & Cucuzza, T. (1995, July).Tapping the Full Potential of ABC. Harvard Business Review. Retrieved from http://hbr.org/1995/07/tapping-the-full-potential-of-abc/ar/1 Son, H., & Schlangenstein, M. (2014, February 3). United to Drop Cleveland Hub as $2 Billion in Savings Sought (1). Bloomberg News. Retrieved from http://www.businessweek.com/news/2014-02-02/united-to-drop-cleveland-airport-hub-in-2-billion-savings-push Victor, D. (2010, April 9). Standard Costing. Inside Business. Retrieved from http://www.insidebusiness360.com/index.php/standard-costing-3-12849/ Read More