A costing system is important in ensuring that the various costs that a business incurs are clearly understood by the management. The system helps greatly in ensuring that the management knows about the performance of the business in terms of the profits, expenses and the various revenues that the business accrues (Garrison et al., 2010). The costings systems usually reports on different areas that include sales and marketing, facilities, departments, sales regions, services and products to name a few.
The major costing systems include the process and job costing system. The job costing system compiles the overhead costs, labor and materials. The job costing system is quite appropriate for products that are non-identical. The job costing system thus allocates the labor and materials that are directly input in the production process, and further assigning to the products through cost records the various expenses incurred. Job costing helps in assigning costs and helps the company to know clearly the profit generated by each job (Drury, 2013). The workforce in job costing should record all inputs to the production process, which can be cumbersome. The job costing system helps in giving the cost of a product in general. The managers can further use job costing to track the performance of employees specifically looking at their productivity, effectiveness and cost control.
The second costing system is process-costing system. The system takes a general approach in that it aggregates the whole production process, which it allocates to the respective units in the production process. The system is used in the determination of the total expenses incurred in production of a single product. It is applied in the companies that products through many sections in the production process. As such, the product can pass through many departments like quality assurance, sales and marketing, distribution and manufacturing. The department does not have the same budgets and therefore all the costs incurred in each department have to be calculated through a costing system. The system is appropriate for companies dealing with large manufacturing of identical products like cars. The system results in a cost accumulation approach that is quite effective and that can embrace automation if need be. The system ensures that cost is contained and checked as a result. The costs accrued by different departments are individually known. It simplifies the tracking of inventory and makes it easier for the value of the company to be calculated. Furthermore, uniformity is maintained as each department is viewed in the same way as the other reducing more costs that may include training of staff.
Activity based costing is another system that was initiated after issues arose due to the inappropriate allocation of overhead costs. The system provides a clearer picture on the allocation of overhead costs to the various cost pools and their resultant distribution to cost objects (Kaplan & Porter, 2010). The ABC costing system is hard to initiate and requires specific and well-defined projects with clear cost allocations. ABC costing gives more vivid picture of the cost of the item. The ABC system clearly looks at all the activities affecting the production process of the item while allocation costs to the various activities associated with the production of the item.
Furthermore, the allocated costs of each activity are further assigned to the items that need the activity in their production. The system provides greater accuracy of the different costs associate with each activity and the product as a result (Rumble, 2012). Only relevant costs are allocated to the product increasing the precision of the costs of production on each item. Moreover, the overhead costs are greatly understood and benchmarking is greatly enabled largely. The only difficulty with the system is that more resources are needed implement the system. Another challenge is that the results from ABC costing can be misinterpreted.
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