Question

Keisha discussed the business plan with her accounting professor who agreed to serve as her part time accountant. His first advice was for the business to develop a budget. Since Keisha did not complete Accounting II, she was not aware of the various costing systems that exist in businesses. Her accounting professor told Keisha of the three different types of costing systems that exist in organizations-job order, process costing and activity-based costing. Required: Discuss all costing systems thoroughly and which one K&J Bakery would most likely use.

Answer 1

Job order costing : the main objective of the costing system is to determine the cost of the product or the service by adding all the costs incurred. In job order costing, we calculate the cost of the particular job which can be either customised or general. The distinguished feature of job costing is that we can determine the actual material, labour and overheads incurred in the job costing. Example, in a toy manufacture company, we can determine the cost of the particular types of toy produced by segregating the material, labour and overhead involved in it from other types of toy

Process costing: Process costing is used in the industry where the costs are determined based upon the process inter linked with each other. There are multi departments in operation to produce a particular mass of product and the units in it do not vary significantly with each other. Example in oil indusry, there various processes which produce various type of oil viz croode oil, petrol, kerosene, diesal. For each process there is a sub process and each process has its own finished goods. In such industries process costing is used

Activity Based Costing: it is costing method similar to the job order costing with differentiation in the method of costing of overheads and its appropriations. In this overheads are not allocated to the the producsts based upon the single rate like machiner rate per hour but based upon the use of different activities in a production process.