Costing is something very important in order to define how much exactly costs that we have been spent. A good calculation on cost itself will be helpful to calculate the profit and define the price per unit for a product. In common, there are three types of costing system. They are Job Costing, Activity Based Costing and Process Costing. We will see briefly three types of these costing system.
Job-order Costing
In job-order costing system, cost of good sold (cogs) from product is determined by dividing cost into different products or services which can be identified. Job in this sense is a task where resources are poured out to bring different products or services which can be identified.
Job-order costing is used in situations where many different products are produced each period. In a job-order costing system, cost are traced and allocated to jobs and then the costs of the job are divided by the number of units in the job to arrive at an average cost per unit.
in service organizations such as law firms, movie studios, hospitals, and repair shops, as well as manufacturing companies this system is being used. However, job-order costing is the most easier and familiar one, could be the most simple one because all the cost beside labor and material can be named as overhead cost.
Strengths:
- The integrated job costing module allows company to track all up-to-date information relating to each project, including project progress and expenditure against its targets and budgets, respectively
Activity Based Costing (ABC)
Definition
In contrast with traditional absorption costing, ABC is designed to be used for internal decision making. Activity-based costing differs from traditional cost accounting in three ways that are in ABC:
- Nonmanufacturing as well as manufacturing costs may be assigned to products, but only on a cause-and-effect basis
- Some manufacturing costs may be excluded from product costs
- Numerous overhead cost pools are used, each of which is allocated to products and other cost objects using its own unique measure of activity
ABC is concerned with overhead – both manufacturing overhead and selling and administrative overhead. Meanwhile, the accounting for direct labor and direct materials is usually the same under traditional and AB costing methods. This system is more complex than job-order costing. This system was made to fill the accuracy in counting overhead cost. ABC usually being used for organization which has a lot of activities such as manufactures or hospital.
Strengths
- Can be used for decision making purposes because it gives better understanding on its costs.
- Though it mostly used for internal process, ABC can also bring outward advantages because the ability to provide the costumer with accurate cost information built a trusting relationship with them.
Weaknesses:
- can be expensive because data concerning numerous activity measures must be periodically collected, checked and entered to the system.
- Can easily be misinterpreted and must be use with care when used in making decisions.
- reports generated by the best activity based costing system do not conform to generally accepted accounting principles. Consequently, an organization involved in ABD should have two cost systems – one for internal use and one for preparing external reports. This also bring confusion on which system is to be believed and relied on.
Process Costing
In this system, cost of good sold (COGS) is determined by dividing cost into homogenous and massive unit and then counting unit cost based on average. Mostly, identical element or product are produced to usual selling, not for particular consumer. There are three differences between job-order and process costing, namely:
- process costing is used when a company produces a continuous flow of units that are indistinguishable from one another
- under process costing, it makes no sense to try to identify materials, labor, and overhead cost with a particular costumer order (as we did in job order costing) because each order is just one of many that are filled from a continuous flow of virtually identical units from the production line.
- Process costing systems compute unit costs compute unit costs by department. This differs for job – order costing where unit costs are computed by job on the job cost sheet
What about in Property?
If we want to have a business in property, the system must be not with process costing. The posibilities are with job-order costing or Activity based Costing. If we want to build or renovate just one or two houses, it still fine with job-order costing. But, if our business is big enough (more than 2 houses) to optimize our profit, it is very reccomended to use ABC. We have to remember that the one of the key to making profit from our project is to get the cashflow right from the start. ABC required to classify the costs listed as arising from either a unit-level, batch-level, product-sustaining or facility-level activity (4 cost pool). So, it must be helpful in order to count our cost accurately.
ABC assumes that the steps or activities that must be followed to manufacture a product are what determine the overhead costs incurred. Here, ABC will write down all the activity cost pools and activity cost drivers such as purchasing department, receiving department, materials, supervisor, legal department, marketing department, with all the their cost drivers. Another costs that we have to aware are direct and indirect costs. This system will be suitable for property business especially for giving the offering price and set the nett price more accurate.
References:
Garisson, Managerial Accounting, New York: McGraw-Hill, 2011.
“Activity Based Costing Activities”, http://www.cliffsnotes.com/study_guide/Activity-Based-Costing-Activities.topicArticleId-21248,articleId-21225.html retrieved at 22:02, 19 April 2013.
“Development Cost and Budgeting”, http://www.channel4.com/4homes/buy-sell/buying-property/property-development/property-ladder-property-development-costs-budgeting-09-06-03 retrieved at 21:02, 19 April 2013.
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