Question

A new client owns and operates of manufacturing business. The client needs to set up a proper cost accounting system (e.g., job order cost, process cost, and ABC) for the business.  This client is seeking general advice as to which type of system is appropriate for the business.

1. In a new post, use the Reply button at the bottom of this page to respond to the question below:
   • Discussion Question 1: Before you provide any advice, what are one or two initial questions you might ask to learn more about the business and manufacturing operations.
   • Discussion Question 2:   The client would like you to differentiate the benefits and disadvantages of each system.
   • Discussion Question 3: Let's assume the client is a commercial landscape designer and contractor. Which type of system would you recommend and why?

Answer 1

Answer 1:

The two questions which should be asked from the company to learn more about business and manufacturing operations are -

1. Is the company producing similar or identical units of product in batches or products are produced only against customer’s order while not maintaining any stock ?

2. The production is continuous or not?  

If the company responds that they are producing similar or identical units of product in batches and are doing continuous production,than 'Process Costing' should be used.

If the company responds that they are producing products only against the customer's order while not maintaining any stock and are not doing continuous production, than 'Job Order Costing' should be used.  

Answer 2 :

The benefits and disadvantages of each system:

Job Order Costing Advantages -

(i) It provides a detailed analysis of cost of materials, wages, and overheads classified by functions, departments and nature of expenses.

(ii) It determines costs more accurately and facilitates cost control by comparing actuals with estimates.

(iii) It provides a basis for estimating the cost of similar jobs taken up in future and thus helps in future production planning.

(iv)  Easy identification of spoilage and defectives related to production orders and departments.

(v) It helps in quoting cost plus contract.

Job Order Costing Disadvantages -

(i) It requires a lot of clerical work and is expensive.

(ii) The scope of committing mistakes is enough as the cost of one job may be wrongly posted to the cost of other job.

(iii) Cost comparison among different jobs becomes difficult.

(iv) It does not facilitate control of cost unless it is used with standard or estimated costing.

Process Costing Advantages -

(i) Easy determination costs periodically at short intervals.

(ii) Simple and less expensive.

(iii) Allows managerial control by evaluating the performance of each process.

(iv) Easy allocation of the expenses to processes in order to have accurate costs.

(v) Easy quotation of prices with standardisation of process.

Process Costing Disadvantages -

(i) Costs obtained at the end of the accounting period are only historical value and are not very useful for effective control.

(ii) Valuation of work in progress is done on estimated basis which result in further inaccuracies in total cost.

(iii) Individual products’ costs may be taken as only approximation and hence not reliable.

(iv) Wide scope of errors.

(v) The computation of average cost is difficult.

ABC Costing Advantages -

(i) Determines accurate product cost.

(ii) Helps in easy decision making.

(iii) Provides cost information.

(iv) Helps in tracing of activities for cost object.

(v) Helps in tracing overhead cost.

ABC Costing Disadvantages -

(i) Expensive and complex.

(ii) Difficulty in measurement.

Answer 3:

Job order costing should be used because commercial landscape designer and contractor, design according to the order of their customer specifically. Therefore, this costing system is the most appropriate method which should be used.