Question

Discuss the the use of process and job order costing and how they provide the management the means to more effectively control the profitability of the firm and mitigate its risk. In your discussions address the difference between financial accounting and managerial accounting.

Answer 1

• Use of Process Costing: The method of process costing is used in cases where there is a mass production of similar products and where the costs associated with the individual units of these products cannot be differentiated with one another. Here, the nature of products being manufactured is homogeneous, and thus, through this method the cost of a product is ascertained at every process or stage of manufacture.
• Use of Job Order Costing: The method of job order costing is used in cases where products are manufactured in an individual basis and this method is employed to accumulate the costs and assign them to the products. In this method, the actual material and labour expenses for the specific jobs are recorded and overheads are assigned to jobs at a pre-determined rate. Through this technique, the exact expenses for materials, labour and overheads that are incurred in operations are determined.
• Ways in which process costing and job order costing provide management the means to more effectively control the profitability of the firm and mitigate its risk: In case of process costing, performance analysis and managerial control is facilitated to a large extent because of availability of cost data in the form of accuarte and prompt cost reports. If we look at job order costing, it helps the management by providing accurate profitability reports on individual operations and helps to monitor the costs incurred throughout the entire manufacturing process. Also, it helps in evaluating whether employees performance is as per the benchmarks and assists in measurement of indirect costs. Thus, it helps the management by providing the means to effectively control the profitability of the firm.
• Difference between financial accounting and managerial accounting: Managerial accounting is concerned with operational reports to assist management in planning and making decisions whereas financial accounting is concerned with preparation of financial statements of an organisation and provide financial information to outsiders. Management accounting reports are neither published nor audited, whereas financial accounting reports are required to be published and audited by statutory auditors.