SLC | S21W3 | Costs For Entrepreneurs - Costing Methods.
Good day, everyone; I am pleased to be taking part in this week 3 SLC. Last week was awesome, and I am looking forward to making this week exceptional. Welcome to the page and let's proceed.
What are costing methods and what is their importance? |
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Costing methods refer to the various techniques used in determining service or production costs. They help business organizations or firms calculate the cost of production or services, identify areas requiring cost reduction, and make knowledge-based decisions about investments and pricing.
There are several different methods of costing utilized in accounting and management accounting. These are some of the most common methods:
A. Traditional Costing Methods
The traditional costing methods comprise:
- Direct Costing: This allocates only direct costs to products.
- Absorption Costing: This allocates fixed and variable costs to products.
- Standard Costing: This type of traditional costing method makes use of predetermined costs to assess actual performance.
- Variable Costing: This only allocates variable costs to products.
B. Activity-Based Costing Methods
The activity-based costing methods include the following:
- Activity-Based Management (ABM): This concentrates on enhancing activities to lower costs.
- Activity-Based Costing (ABC): This is concerned with allocating costs on the basis of activities performed.
C. Marginal Costing Methods
The marginal costing method is composed of the following:
- Differential Costing: This method of costing assesses the similarities and differences of costs between varied alternatives.
- Marginal Costing: This concentrates on the extra cost of production of one more unit.
D. Modern Costing Methods
The modern costing method is made up of the following:
- Target Costing: This costing method sets target costs on the basis of market conditions.
- Lean Accounting: This type lays emphasis on the elimination of waste and optimizing processes.
- Kaizen Costing: This is the type of costing that continuously enhances costs through small changes.
- Throughput Accounting: This concentrates on the maximization of sales revenue.
E. Industry-Specific Costing Methods
This method of costing is comprised of the following:
- Job Costing: This is a method utilized in construction, projects, and manufacturing.
- Operation Costing: A costing method utilized in manufacturing and assembly lines.
- Process Costing: This is a method of costing utilized in continual production environments.
F. Other Costing Methods
This method of costing is comprised of the following:
- Actual Costing: This makes use of the actual costs incurred.
- Historical Costing: This method employs past costs as an underlying condition for future costs.
- Budgetary Costing: This method assesses the similarities and differences between actual costs and budgeted costs.
- Normal Costing: This makes use of average costs over a period.
The Importance Of Costing Methods
Every costing method has its strengths as well as weaknesses, and organizations mostly utilize a combination of methods to match their specific needs. Nevertheless, the following are the importance of the various costing methods:
- Accurate Cost Calculation: Helps in the determination of true production costs.
- Cost Control: Identifies areas that require cost reduction and optimization.
- Performance Evaluation: Comparison of actual costs and budgeted costs.
- Competitive Advantage: Assists an establishment or business organization to remain competitive through cost management.
- Informed Decision-Making: Allows administrators or managers to make data-driven decisions.
- Pricing Strategy: Helps in the determination of optimum prices based on costs.
- Resource Allocation: Guarantees efficient appropriation of resources.
- Financial Reporting: Makes accurate financial information attainable for stakeholders.
Benefits of Effective Costing Methods
Besides the above-listed importance, there are other advantages of the varieties of costing methods.
- Improved Cost Management
- Raised Efficiency
- Enhanced Pricing Strategy
- Correct Financial Reporting
- Ameliorated Profitability
- Improved Decision-Making
- Mitigates Waste and
- Better Competitiveness
Efficacious costing methods allow organizations to make knowledge-based decisions, make resources more efficient, and realize strategic objectives.
Explain the difference between the job order and process costing methods. |
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Job Order Costing and Process Costing are two varied methods used in the determination of the cost of producing goods or services. To establish their differences, we may have to first understand the two as well as their characteristics.
Job Order Costing
Job Order Costing is a method employed in the determination of the cost of producing a particular job or order. This method is used when:
- Every job is unique and has differing requirements.
- The cost of every job requires to be tracked individually.
- Jobs are manufactured in little batches or one-off.
Major characteristics of Job Order Costing
- Direct costs: Direct costs, like materials and labor, are tracked directly to every job.
- Unique jobs: Every job is distinct with differing requirements.
- Overhead allocation: Overhead costs are appropriated to every job on the basis of a foredetermined rate.
- Job cost sheet: A job cost sheet is employed in tracking the costs of every job.
Process Costing
This is a method used in the determination of the cost of manufacturing an ample quantity of selfsame products. This method is used when:
- The cost of production is stretched out across an ample number of units.
- Products are manufactured in bulky quantities.
- Products are selfsame and with same requirements.
Major characteristics of Process Costing
1.Cost accumulation There is an accumulation of costs for every department or process.
- Mass production: Products are manufactured in huge quantities.
- Equivalent units: Calculation of costs are based on virtually equal units produced.
- Identical products: Products are selfsame having the same requirements.
Key differences between Job Order Costing and Process Costing
| Overhead Allocation | Appropriates overhead costs to every job on the basis of a predetermined rate | Appropriates overhead costs to every department or process |
| Production Volume | Utilized for little batches or one-off jobs | Utilized for huge quantities of selfsame products |
| Cost Calculation | Calculates costs on the basis of actual incurred costs for every job | Calculates costs on the basis of virtually equal units produced |
| Cost Tracking | Traces costs for every job individually | Accrues costs for every department or process |
The bottom line is that while Job Order Costing is utilized for sui generis jobs or little batches, Process Costing is employed for huge quantities of selfsame products.
Research and explain, to the best of your understanding, two costing methods different from those explained in this class. |
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The two costing methods I will be explaining are Differential Costing and Normal Costing
Differential Costing
This is a method of costing that involves the comparison of the cost of two or more alternatives to ascertain the most cost-effective alternative. This method is used to assess the variations in costs between differing options, such as:
• Accept or Reject Decision: Whether or not to accept a special order.
• Make or Buy Decision: Whether to manufacture a product in-house or subcontract it.
• Replace or Retain Decision: Whether to replace or retain an existing asset.
Key characteristics of Differential Costing
- Differential costs: Calculates the variation in costs between options.
- Comparative analysis: assesses the similarities and differences of the costs of two or more options.
- Decision-making: Assists in making decisions on cost differences basis.
- Relevant costs: Solely considers relevant costs that vary between options.
Normal Costing
This is a method of costing that involves estimation of the cost of production on the basis of normal or anticipated conditions. This method serves for the determination of the standard cost of service or production.
Key characteristics of Normal Costing
- Normal capacity: Supposes normal capacity usage.
- Standard costs Roughly calculates costs based on normal or anticipated conditions.
- Efficient operations: Assumes effective operations as well as no waste.
4.Predetermined costs: determines costs prior to actual production.
Major differences between Differential Costing and Normal Costing
| 1. | Scope | Is utilized for particular decisions | Is utilized for in-progress production |
| 2. | Cost Estimation | Puts relevant costs into consideration | Appraises costs on the basis of normal conditions |
| 3. | Decision-making | Assists in decisions-making | Makes a standard cost for pricing attainable as well as valuation of inventory |
| 4. | Purpose | Employed for making decision | Utilized for rough calculation of standard cost |
In summary, Differential Costing is employed for decision-making by assessing the similarities and differences between the costs of different alternatives, while Normal Costing is employed to roughly calculate standard costs based on normal conditions.
Perform the costing by work orders, according to what was explained for a cake manufacturing business. |
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Costing By Work Orders For A Cake Manufacturing Business.
Business Details
- Business Name: Hisgeneral Confectionaries
- Product: Customized Cakes
- Production Process: Every cake is produced individually, and the process of production involves mixing, baking, decorating, and packaging.
Work Order Details
- Work Order Number: HG442
- Customer Name: Little Star
- Cake Details: 2-tiered chocolate cake alongside vanilla frosting as well as decorations
- Quantity: 1 cake
- Production Date: November 17, 2024
Direct Materials:
| Flour | $1.30/kg | 2 kg | $2.60 |
| Sugar | $0.70/kg | 1 kg | $0.70 |
| Chocolate chips | $1.30/500g | 450g | $1.17 |
| Vanilla frosting | $3.50/kg | 1 kg | $3.50 |
| Decorations (assorted) | $4.50 | $4.50 | |
| Total Direct Materials Cost | $12.47 |
Direct Labor
| Mixing and baking | $14.00 | 2 hours | $28.00 |
| Decorating | $13.00 | 1 hour | $13.00 |
| Packaging | $14.00 | 0.5 hours | $7.00 |
| Total Direct Labor Cost | $48.00 |
Overhead Costs
- Factory rent: $450.00/month (appropriated to every cake based on production time)
- Utilities: $175.00/month (appropriated to every cake based on production time)
- Equipment depreciation: $95.00/month (appropriated to every cake based on production time)
Total Overhead Costs: $720.00/month
- Appropriated Overhead Cost per cake: $720.00/month ÷ 20 cakes/month = $36.00/cake
Total Cost
- Direct Materials Cost: $12.74
- Direct Labor Cost: $48.00
- Overhead Cost: $36.00
- Total Cost: $96.74
Selling Price
- Selling Price: $140.00
- Profit: $140.00 - $96.74 = $43.26
Work Order Costing Summary
| Cost Element | Cost |
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| Direct Materials | $12.74 |
| Direct Labor | $48.00 |
| Overhead | $36.00 |
| Total Cost | $96.74 |
| Selling Price | $140.00 |
| Profit | $43.26 |
By employing the work order costing method, Hisgeneral Confectionaries can accurately trace the production cost of each cake and make knowledge-based decisions about pricing and production.
Thank you for your time and reading through. I want to invite @ninapenda, @roselove, and @divinelife to join the contest