Question

What kind of a costing system should the following businesses have? State two reasons supporting each type.

1.Flower bouquet shop

2.Plastic bottles manufacturing company

3. Shampoo manufacturing company

Answer 1

Costing is the classifying, recording and appropriate allocation of expenditure for the determination of the costs of products or services, and for presentation of suitably arranged data for the purposes of control, and guidance of management.
A costing system is designed to monitor the costs incurred by a business. The system is comprised of a set of forms, processes, controls, and reports that are designed to aggregate and report to management about revenues, costs, and profitability.
Costing system to be followed in a particular enterprise depends upon:
(i) Nature of Industry,
(ii) Class of products manufactured,
(iii) Quantity of goods produced, and
(iv) The way the workers are employed and paid.

There are two main types of costing systems. A business can accumulate information based on either one, or adopt a hybrid approach that mixes and matches systems to best meet its needs. The primary costing systems are:

a. Job costing system
b. Process costing system.

Now let's consider the given type of businesses and the type of costing system they have.

1. Flower bouquet shop:
The costing system suitable for flower bouquet shops is Job order costing.
This system is also known as “order costs” or “terminal costs”. In this method all the items are charged to a specific order. Flower bouquet shops normally operate by taking specific orders from customers and are charged according to the work done. Daily record of direct material, direct labour and estimated overhead cost for each order is recorded in production order or cost sheet and thus the total cost of the job is obtained from the cost sheet.

2. Plastic bottles manufacturing company:
The costing system suitable for plastic bottles manufacturing company is process costing.
This method is applied to manufacturing industries such as oil refining, chemical, paint and other similar industries, where the raw material passes through a number of processes or operations before it is converted into a final product. Plastic bottle manufacturing also have lots of processes before it converted into finished products. There will be mass scale of production of bottles. The process costing is adopted for such industries having mass scale production.

3. Shampoo manufacturing company:
The costing system suitable for shampoo manufacturing company is process costing.
This method is applied to manufacturing industries such as oil refining, chemical, paint and other similar industries, where the raw material passes through a number of processes or operations before it is converted into a final product. Manufacturing of shampoo involves big process of converting different raw materials into final products. The costs are needed to be estimated and evaluated at each and every stages of production.