Costing System Analysis

Analysis of different costing system

Baburam Parajuli

Managerial Accounting

2016-11-20

Mr. Dilip Baral

Presidential Business School

Westcliff University

Abstract

This research aims to give a brief overview about the research on the three different types of costing system (Job order costing, process costing and activity based costing). It gives an outline about the similarities and differences between job order costing and process costing. And also it describes about the costing system which best suits for the service agencies. The study also gives brief information about the role of job order and process costing in making business decisions. The paper provides contextual background about activity based costing accounting system and also

But, this costing system engaged is not as direct as the process involved in job order costing. The system of process costing can be seen as simple mathematical procedures like percentages, proportions, and averages. However, in job order costing, (material, labor and overhead) absorbed per job are summed together to reach at the manufacturing cost of the job. (Galway, 1991)

Job order costing is preferable for a service industry. This accounting methodology is commonly used in the service sectors like law firms, hospitals, accounting firms, movie studios, repair shops and advertising agencies. These service sectors use job order costing for billing purposes and also to assemble costs for accounting purposes. The procedures of keeping records under job order costing used by many service organizations are identical to the methodology used by various manufacturing industries.

Service industries offer various kinds of services to the people. A lawyer for instance keeps separate cost records of advising and defending his clients. As job order costing maintains costs for each distinct product or job, it would be the best costing methodology to be applied by the service industries to maintain their cost records in an efficient

In modern business, the commonly used costing systems are traditional costing and activity-based costing. Traditional costing is the methodology that assigns overhead costs on the basis of volume of a cost driver like the machine hours needed to produce an item. Factors like direct labor hours and machine hours that results the costs to incur are called the cost drivers. Activity-based costing is the system that uses different activities to allocate the costs of producing a product.

Traditional costing relies on assigning average overhead rates. So it is easier to determine the cost of product in this costing system. But, this costing methodology cannot determine which overhead costs really affect the particular products. Activity based costing assigns overhead costs to products in more effective way than the traditional approach. Traditional costing system simply allocates costs on the basis of machine hours or labor hours. But, activity based costing deals the same case in a different way. Initially, it assigns costs to the activities (the real cause of the overhead). Then the cost of those activities is assigned to the products that actually demand the