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What are costing methods and what is their importance |
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Costing methods are some of the particular strategies useful for determining costs of producing goods or different kind of services. These are helpful for businesses for making calculations of total cost of production, identifying areas for reducing costs as well as for making informed decisions.
• Job order costing used for customized products.
• Process costing for similar goods.
• Absorption costing used for fixed overhead.
• Activity based costing used for assigning costs to activities.
• Standard costing used for predetermined costs.
• Marginal costing used for variable costs.
• Direct costing utilized for direct costs.
• Throughput accounting used to focus at bottleneck resources.
• Lean accounting is useful for reduction of wastes.
• Target costing for setting targeted costs.
• Kaizen Costing used for continuous improving.
Importance of costing methods:
• Cost calculation in accurate way
• Making more informed decision
• Controlling and reducing costs
• Analysis for making profit
• Evaluation of performance.
• Setting proper strategies for pricing.
• Inventory valuation.
• Strategical plans making.
| Industry specific costing methods |
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• For the purpose of construction we use job order costing.
• For the purpose of manufacturing we use process Costing, absorption Costing.
• For providing different services we use activity based costing.
• For healthcare purpose we use standard costing.
• For retailing purpose marginal costing is utilized.
• You should keep in mind your business size and complexity.
• You should know the needs specified to industries.
• You should know diversity of products or services.
• You should know the conditions of market.
By having a know how and by applying real costing method businesses can be helpful in optimizing operations, in improving profitability and in making informed decisions.
Explain the difference between the job order and process costing methods |
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Job order costing us utilized for customized, unique products or services.
• Jobs are separated and distinctive individually.
• Costs are properly tracked and recorded in a distinctive way for every job.
• Costs contains direct materials, labor, and overhead.
• Jobs completion occurs in short time.
• Projects of construction.
• Customized furniture.
• Consultation service.
• Repairing and maintaining.
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Process costing is effective and used for mass-production as well as for identical products.
• Products are normally constructed in bulk.
• Costs are average over a batch or for producing time period.
• Costs again contains direct materials, labor and overhead.
• Products have to go through different processes.
• Processing of food.
• Manufacturing of textiles.
• For production of chemicals.
• For assembly line production.
| Job Order Costing | Process Costing |
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| Volume of production | Diminished | Increased |
| Product Customization | Increased | Diminished |
| Tracking of cost | On basis of individual jobs | On average costs |
| Production Period | Diminished | Increased |
| Examples | Constructing, Consultation | Processing of food , manufacturing of textiles |
There is a need to choose real costing method according to your requirements depending upon your business particular requirements and production processes.
Research and explain, to the best of your understanding, two costing methods different from those explained in this class |
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These are two unique costing methods;
This is a methodology useful for assigning predetermined costs to products depending upon efficiency and productiveness which is expected.
- Establishment of standard costing is specifically for materials, labor, and overhead
- Comparison making of actual costs with standard cost.
- Variations are analyzed and then corrected after making more preciseness in it.
As an example;
Suppose there is a car constructuer who is setting standard costs for parts, labor, and overhead for each unit.
- Encouragement of efficiency and productivity
- Simplification of cost tracking
- Highlighting cost variations.
This methodology is assigning just variable costs to products by exclusion of fixed costs.
- Differentiating variable costs which are direct materials, labor etc from fixed costs
- Calculations of contribution margin such as sales to variable costs)
- Have most of the focus at incremental costs.
As an example ;
Suppose that there is a textile company which is using marginal costing for deciding that whether there's a need to accept additional orders or not.
- Helpful for making decisions such as pricing, production etc.
- Primary focus is at variable costs which affects profit.
- Simplify break even analyzation.
Perform the costing by work orders, according to what was explained for a cake manufacturing business |
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I am here to perform job order costing for a cake manufacturing business.
- Type of manufacturing cake : Custom birthday cake (3-layered)
- Customer: Sahar birthday
- Date of order : 1st December
- Date of delivery : 20 December
| Material | Amount | Price /unit | Overall costs |
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| White flour | 10 kg | $2/kg | $20 |
| Sugar | 5.5 kg | $1.5/kg | $7.50 |
| Eggs | 21 | $0.50/egg | $10 |
| Butter | 2.5 kg | $3/kg | $6 |
| Decorations | 1 set | $50/set | $50 |
| Total Direct Materials | | | $93.50 |
| Working | Timing | Wages/hr | Overall labor cost |
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| Bake | 3 hours | $15/hour | $60 |
| Decorations | 4 hours | $20/hour | $120 |
| Total Direct Labor | | | $180 |
- Overhead rate which was allocated was 20% from total direct labor costs
- Overhead costs are around $180 which is direct labor multiplied by 0.20 so it's $36 s and outcome.
- Direct materials cost is around $93.50
- Direct labor cost are equal to $180
- Overhead costs are $36
- Total cost are at $309.50
- Markup should be 50% of total cost
- Selling price should be $309.50 multiplied by 1.5 which is overall $464.25 after calculating it.
| Work Order #001 (Sahar birthday Cake) |
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- Date: 1st December.
- Customer: Sahar birthday
- Cake Type: Custom birthday Cake (3-layered)
- Total Cost are $309.50
- Selling Price is $464.25
- Profit obtained is $154.75 ($464.25 - $309.50)
This job order costing example is helping cake manufacturing business tracking costs, calculations of profit and for making informed decisions related to pricing and production.
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