SLC | S21W3 | Costs for entrepreneurs - Costing methods.
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Hello 🤗 guys,
I welcome you all to the Steemit Learning Challenge season 21 week 3 on a contest organised by @yolvijrm & @adeljose which talks about Costs for entrepreneurs - Costing methods. I'm going to be sharing my understanding on the said topic below as I try to attempt all the questions below.
| What are costing methods and what is their importance? |
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The various approaches used in determining the cost of producing various goods and services is what we call costing methods. The essence of these method is to enable businesses or organisation allocate expenses accurately which will inturn enable them to set price of the products and also maximise profits when the product is been sold.
The various costing method include Job Costing, Process Costing, Activity-Based Costing (ABC), Standard Costing and Marginal Costing. For a clear and better understanding let me explain the various methods of costing listed above.
Job Costing: As the name suggests job costing, this type of costing is associated with cost that are assigned to specific job or projects. These types of cost are cost usually seen in construction companies or manufacturing company. We will see more details as we progress.
Importance: Since it is designed for a specific project or job, it aims at ensuring that the project are priced correctly.
Process Costing: This type of cost as the name implies is a cost used in the production process which means a continuous production of item such food and the cost is dependent on the amount produced.
Importance: This costing helps to provide per unit cost in a large production which helps the company to keep clear records of their prices.
Activity-Based Costing (ABC): Here cost are allocated based on the activities within the production and not based on the volume produced.
Importance: Since it focuses on cost based on activities, it helps to improve the process as the activities to achieve a production is taken into consideration.
Standard Costing: A cost used to set a predetermined cost for materials, labor and others which enable businesses to check the performance of the said asset is what we call standard cost.
Importance: The standard cost is used for comparing actual cost and standard cost to know where needs an improvements.
Marginal Costing: This type of cost is also seen as the variable cost as it changes with production volumes and doesn't take into account the fixed cost during decision making.
Importance: This type of costing support short term decision making which states that making more production will be profitable to the business owners.
Importance of Costing Methods
There are many importance of costing method and a few of these importance include
Pricing Strategy: One of the major importance of costing method is that it allows businesses to set up price that covers expenses and generate profit.
Profitability Analysis: Cost analysis of goods and services gives producers the room to know which is more profitable and then the go for it as business is meant to make gain.
Budgeting and Planning: Here budgeting for future production is taken into account also resources are allocated based on that.
Efficiency and Waste Reduction: Costing helps to reduce waste as the production and pricing will solely depend on what is on ground.
Financial Reporting: With the help of costing method, accurate information with regards to the finances are taken into consideration which aid them in making profit in their business as cost of production is well covered.
| Explain the difference between the job order and process costing methods. |
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Job Order Costing and Process Costing are different methods of costing used by different production companies or industries to enable them effectively calculate the costing of the production done in their company. Here in this question, I will use a tabular method to different between them.
| Aspect | Job Order Costing | Process Costing |
|---|---|---|
| Production | Used in production where orders have a given specification, here customers give specifications of what they want to be produced for them | Used in production where similar production is done in large volume e.g producing food |
| Cost Accumulation | Since production are based on specifications it means that cost also is done based on the particular job done as it carries different process from others | Here since production are done in bulk, the cost here is based on the entire production since it is manufactured same way. |
| Cost Calculation | Calculation here is done by calculating per job cost, also the unit cost is determined by dividing the total cost of the job by the number of units produced | Here total cost is determined by dividing it with units produced since it is a continuous production. |
| Suitable Industries | Best suited in companies or factory making produce of a specialized produce | Companies making mass produce of similar products are they once suited for this method of cost |
| Record Keeping | Since they make produce of specialised produce based on customer specifications, they keep accurate record of everything within the production such as material, labour and many more | Here since production is done in mass, it requires less record keeping as the record of each process is taken into account |
These are some of the major difference which one must note between Job Order Costing and Process Costing.
| Research and explain, to the best of your understanding, two costing methods different from those explained in this class. |
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Based on the lecture delivered we were taught the Job Order Costing and the Process Costing hence for this reason I will be discussing Marginal Costing (Variable Costing) and Activity-Based Costing (ABC) in details below.
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Costing methods as explained previously are the various approaches which a business or company uses to allocate prices to their products as well as services. I will want to discuss this on the following headings, definition, industries, how it works and purpose.
Marginal Costing (Variable Costing)
Marginal Costing (Variable Costing): As earlier briefly explained above, this type of cost is also seen as the variable cost as it changes with production volumes and doesn't take into account the fixed cost during decision making as they are treated as period cost when calculating per unit production.
Industries: This type of cost is used in industries when analysing short term production and making decisions in the industries.
How It Works: In calculating this type of cost, only variable cost are taken into consideration and fixed cost are ignored.
Purpose: This type of costing support short term decision making which states that making more production will be profitable to the business owners.
Activity-Based Costing (ABC)
Activity-Based Costing (ABC): Here cost are allocated based on the activities within the production and not based on the volume produced. It focuses more on indirect cost.
Industries: This type of cost is used in complex organisation such as health centre and manufacturing companies where more complex activities are done.
How It Works: In calculating this type of cost, activities within production are the main things calculated and then assigned to the product based production.
Purpose: ABC since it deals with activities, it tells us about the major things that drives cost of producing anything as with the activities prices are allocated for the purpose of profit making.
| Perform the costing by work orders, according to what was explained for a cake manufacturing business. |
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In the case of a cake manufacturing business, the costing method that is most ideal to obtained a better result is Job Order Costing as there are different specifications of cake required based on what the customer wants. Below I want to make a presentation for a 6-inch caake.
Cost of these cake manufacturing can be broken down into direct material, direct labour and overhead cost. Now let's consider customer order.
Customer Order Details:
- Size: 6-inch, 2-layer chocolate cake
- Serves: 5 people
- Customization: Personal message
Direct Material
- Flour: 0.5 kg = $3.00
- Sugar: 0.4 kg = $0.50
- Eggs: 5 = $1.50
- Butter: 0.3 kg = $1.20
- Chocolate: 0.5 kg = $1.50
- Total Direct Material Cost = $7.70
Calculate Direct Labor Costs
- Baking and Preparation Time: 7 hour = $7.00
- Decoration and Customization: 2 hours = $2.00
- Total Direct Labor Cost = $9.00
Calculate Overhead Costs
- Overhead Rate = $5 per labor hour
- Total Labor Hours for Order = 1.5 hours
- Overhead Cost = 1.5 hours x $5/hour = $7.50
Total Cost for the Work Order
Total Direct Material Cost = $7.70
Total Direct Labor Cost = $9.00
Overhead Cost = $7.50
Total Cost for the Cake = $7.70 + $9.00 + $7.50 = $17.20
Desired Profit Margin
- Desired Profit Margin: 20%
- Selling Price = Total Cost x (1 + Profit Margin)
- Selling Price = Total Cost x (1 + 0.20)
- Selling Price = $17.20 x 1.20 = $20.64
Costing by Work Order for Cake Manufacturing
- Total Cost for Custom Cake = $17.20
- Selling Price (with 20% margin) = $20.64
I want to finally invite @josepha, @solaymann, and @suboohi to join the contest and share their entry if they haven't done so yet.
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