Costing System: Job Costing vs Process Costing vs Activity Based Costing

This article discusses job costing, process costing and activity based costing. It explains the differences and similarities between them and how they can help in decision making. It also includes examples and references to support the information provided.

Running head: COSTING SYSTEM
Costing System
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Table of Contents
Answer to question 1:.................................................................................................................2
Answer to question A:............................................................................................................2
Answer to question B:............................................................................................................3
Answer to question C:............................................................................................................3
Answer to question 2:.................................................................................................................5
Answer to question A:............................................................................................................6
Answer to question B:............................................................................................................6
References:.................................................................................................................................8

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Answer to question 1:
Answer to question A:
Job costing is referred as the method where each job is ascertained is treated as Job
Costing. A technique of costing that is used to compute the cost of every process is
performed is regarded as process costing (Zeff, 2016). Job order costing refers to that type of
account that is applicable where the work is contained to the rare necessity. Job costing is
referring to the form of order which is applicable where the work is embraced as per the
prerequisites of the customer’s order. Under this system of costing, a different book is kept
for every job order. The job orders system of costing collects manufacturing costs
autonomously for every job (Marshall 2016). The process costing on the other hand is the
particular steps or the stages of jobs to be carried out in the manufacturing activity. It is the
method of cost accounting where cost is charged to every process or procedures and arrives at
the middle point for every unit produced.
Basis of Comparison Job Costing Process Costing
Meaning Job costing is understood as
computation of cost of
special contract, order of
work where job is carried
out based on the instructions
of customers or clients (Ellul
et al., 2015).
Process costing refers to the
method where cost that are
charged to numerous
processes and operations is
determined.
Nature Job costing involves
customized production
Process costing comprises of
standardized production
Identity Under job costing every job Under process costing, the

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is different from another. products are manufactured
successively which results in
losing their identity
(Morden, 2016).
Type of Industry Job costing is more
appropriate for industries
that manufactures products
depending upon the orders
of customers.
Process costing is more
suitable for the industry
where the mass production
is carried out.
Work-In-Process Work in process might or
might not exist during the
early stages or at the end of
financial year.
Under the process costing
the work in process would
be always present in the start
or during the end of
accounting year.
Answer to question B:
Service firm such as advertising agency makes the use of job costing system. The
service firms have resulted in development of job costing process (Kaplan & Atkinson,
2015). The materials under the job costing system can be easily tracked. However, keeping
the record of the amount of money spend on the different jobs and their productivity has been
the outcome of the efforts for the service firms.
Answer to question C:
Although job costing and process have their respective differences but these costing
has similarities as well. Job costing is method of costing which is recognized as the important
for the product cost in decision making process to the company (Langfield-Smith et al.,

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2017). Both the job order costing and process costing info is needed by the management in
decision making process. Under the process costing the unit cost of information is obtained
from the cost report of departmental production. While under the job costing the unit cost
information is attained from the job cost sheet. Both the job order costing and process costing
enables the managers in making decision that might be impaired by remaining dependent on
the qualitative observation. Both the cost information system plays a vital role in each
organization in decision making procedure.
Management are assigned with the task of making sure that a control over the
operations, activity sectors and processes is implemented (Chak & Fung, 2015). Even though
in attaining the objectives of a company complete numerous system of controls, the system of
costing is noteworthy since it helps in monitoring the results. A detailed analysis of cost,
computation of production costs, quantification of loss and estimation of work efficiency
offers a solid base for financial control. Both the process and job costing system provides the
company with the competitive edge and provides information relating to the accuracy of the
estimation which motivates the business in improving the cost until they have the acceptable
granularity.
Having the information of majority of company spending to create a unit of product is
precious when determining the sales price. furthermore, both the system of costing is useful
in setting the normal sales price as it is helpful in ascertaining whether or not to take the
special orders at the lower prices (Eldenburg et al., 2016). Both the job and process costing
system helps in treating the costs in the manner that identifies costing system to stabilize the
net income according to the changes in the production level.

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Answer to question 2:
Activity based costing can be defined as the method of costing which recognizes
activities in the organization and assigning the cost of every activity with the resources to
every products and services based on the actual consumption for each activity (Uyar &
Kuzey, 2016). ABC costing helps in assigning more indirect costs into the direct costs in
comparison to the conventional costing. The ABC costing pursues the objectives of
improving the cost accuracy and true profitability of the individual’s products and services.
Companies that makes the use of ABC continually and effectively is considered as
practice activity based management. For example, a company which is manufacturing the
parts of automobile through the order of machinery work on the metal stock. Under the such
situation the traditional cost only considers the product production charges as either the direct
cost or the indirect costs (Cooper, 2017). Direct costs are similar under the traditional cost
and ABC method. For the direct cost the accountants evaluate the product costs for every
direct cost category. The two method of costing is different however, they allocate the values
of indirect cost for each of the products.
In another example, a company which is manufacturing and selling the two product
model such as A and Model B. These kinds of estimation need the understanding of the entire
price per unit for each of the produce. Whereas, the direct cost per unit is simple to locate
while the indirect cost is less noticeable (Kamal, 2015). Consequently, a business would have
to uncover indirect product costs with the help of costing method either the traditional cost
allocation or the activity based costing. The direct cost remains similar under the traditional
costing and ABC. For the direct costs, the accountants measure the unit cost of products for
each class of the direct cost. The way in which they assign the indirect costs for each products
is different under the two method of costing. Consequently, the two method of costing is
different from each other in terms of profitability of individual products.

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Answer to question A:
With the ABC system of costing, an organization can roundly estimate the elements
of cost for the entire products, activities and services that might help in making informed
decision. The ABC system of costing has predominantly been useful in supporting strategic
decision particularly in the areas of outsourcing, decision making, identification and
measurement of process improvement initiatives (Velasquez et al., 2015). The ABC is helpful
in decision making as it helps in identifying and eliminating the products and services which
is non-profitable and reduces the prices of those products which is overpriced.
ABC costing helps in making decision by recognizing and eliminating the production
or service procedure which is not effective in allocating the concepts of process that results in
similar product at a better yield (Kaplan & Atkinson, 2015). The ABC is treated as the
management decision making tool. By linking cost to each activity, a clear relationship can
be created by establishing cost between the bases of activity demanded and the associated
costs.
The ABC method of costing is very accurate method of costing that prompts more
specific valuation of options. The ABC costing helps in building the expense drivers and
makes excess non-worthy exercise more noticeable. The ABC method of costing is sufficient
to track the cost of different activities (Marshall, 2016). The ABC method of costing is useful
in decision making by assessing the costs related to the specific activities and resources for
both internal and external customers. The information relating to cost can be adjusted to
record the expected changes and predicting the future costs.
Answer to question B:
The activity based method of costing allocates the expenditure on the premise of
movement and the cost driver of every activity. The ABC costing helps in allocating the

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overhead to different movement expense pools (Zeff, 2016). There are three overheads rates
method is used under the ABC costing based on the lights of premises are direct materials,
direct labour and overhead rate on the premises of power devoured.
The above stated overhead rates is used to compute the cost of overhead for any
organization and designating the cost for substantial the cost management (Eldenburg et al.,
2016). Due to these overheads rate that is used to locate the taken toll with respect to the
activity, the ABC helps in providing precise results for the costing of materials, labour and
overhead to reduce the cost and earn profit.

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References:
Chak, S. C., & Fung, H. (2015). Exploring the effectiveness of blended learning in cost and
management accounting: An empirical study. In New Media, Knowledge Practices
and Multiliteracies (pp. 189-203). Springer, Singapore.
Cooper, R. (2017). Supply chain development for the lean enterprise: interorganizational cost
management. Routledge.
Eldenburg, L. G., Wolcott, S. K., Chen, L. H., & Cook, G. (2016). Cost management:
Measuring, monitoring, and motivating performance. Wiley Global Education.
Ellul, A., Jotikasthira, C., Lundblad, C.T. & Wang, Y., (2015). Is historical cost accounting a
panacea? Market stress, incentive distortions, and gains trading. The Journal of
Finance, 70(6), pp.2489-2538.
Kamal, S. (2015). Historical Evolution of Management Accounting. The Cost and
Management, 43(4), 12-19.
Kaplan, R. S., & Atkinson, A. A. (2015). Advanced management accounting. PHI Learning.
Langfield-Smith, K., Smith, D., Andon, P., Hilton, R., & Thorne, H. (2017). Management
accounting: Information for creating and managing value. McGraw-Hill Education
Australia.
Marshall, D. (2016). Accounting: what the numbers mean. McGraw-Hill Higher Education.
Morden, T. (2016). Principles of strategic management. Routledge.
Uyar, A. & Kuzey, C., (2016). Does management accounting mediate the relationship
between cost system design and performance?. Advances in accounting, 35, pp.170-
176.

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Velasquez, S., Suomala, P., & Järvenpää, M. (2015). Cost consciousness: conceptual
development from a management accounting perspective. Qualitative Research in
Accounting & Management, 12(1), 55-86.
Zeff, S. A. (2016). Forging accounting principles in five countries: A history and an analysis
of trends. Routledge.