Question

Discuss the situations in which each three of costing system in accounting would be best employed by a business.

Answer 1

a. Cost accounting system is a framework used to estimate the cost of products for profitability analysis, inventory valuation and cost control.

b. Types of cost accounting systems:

1. Job costing: Cost accounting system that accumulates manufacturing costs separately for each job. It is appropriate for firms that are engaged in production of unique products and special orders. Businesses that use this cost accounting system: event management companies, repair of buildings and painting.

2. Process costing: Cost accounting system that accumulates manufacturing costs separately for each process. It is appropriate for products whose production is a process involving different departments and costs flow from one department to another. Businesses that use this cost accounting system: oil refineries, chemical producers, etc.

3. Activity based costing: ABC considers all the costs associated with a single manufacturing task, regardless of whether they fall under the headings of labor or materials or something else. The benefit of this method is that management can keep track of tasks that cost the most versus which add the most value; indicating any disproportionate amount of money being spent on low-value activities, thereby indicating the need for process change. Businesses that use this cost accounting system: Manufacturing, construction and healthcare companies