Job Order Costing vs. Process Costing: A Managerial Accounting Report

This report provides a detailed comparison of job order costing and process costing, two major costing systems used in manufacturing. It discusses the applicability of each system, highlighting industries that benefit from job order manufacturing (e.g., clothing, aircraft) versus those suited for process manufacturing (e.g., pharmaceuticals, chemicals). The report further examines activity-based costing (ABC) and its usefulness in decision-making, particularly in complex environments with high overhead costs. It also explores different overhead rate methods, including plant-wide, departmental, and activity-based costing plant methods, concluding that the choice of costing method depends on the specific industry and its needs for accurate cost allocation and informed decision-making. Desklib offers a wide range of resources, including past papers and solved assignments, to support students in their academic endeavors.

Running Head: Managerial Accounting 0
Report on
Managerial Accounting
Table of Contents

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Introduction:..........................................................................................................................................1
Comparison between the job and process manufacturing:.....................................................................2
Which system to opt?............................................................................................................................2
Decision making information:...............................................................................................................3
Activity based costing:..........................................................................................................................3
Decision making using Activity Based Costing:....................................................................................4
Overhead rate methods and its usefulness:............................................................................................4
Plant wide method:............................................................................................................................4
Departmental Method:.......................................................................................................................5
Activity based costing plant method:.................................................................................................5
Conclusion:..........................................................................................................................................5
Bibliography:.......................................................................................................................................5

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Introduction:
The two major costing systems which are used in manufacturing are job order manufacturing
and process manufacturing. In this report there is a contrast of the above two mentioned
costing systems, how they are helpful in decision making and which firms opt for these kinds
of systems. Also further activity based costing is examined and its usefulness is analysed.
Comparison between the job and process manufacturing:
Job order manufacturing also known as job order production is a process of customizing the
products according to the customer’s needs. It accumulates the cost of production attributable
to ‘lot’ of units or specific ones. On the other hand in process manufacturing the goods are
produced by combining supplies, substances of raw nature and ingredients using a recipe or
formula. They cannot be disassembled. The output of one becomes input for other (Parker &
Fleischman, 2017).
Job order manufacturing is applicable in industries such as clothing, aircraft, food companies,
accounting firms, movie producers, and hospitals and more whereas some examples of
process costing industries are pharmaceuticals, plastics and chemicals, gasoline, canned or
soda bottles and more.
Under job costing the products are unique whereas the products are standardized in the latter
system. Also the former one requires a lot of bundle of books to keep up as records unlike in
process costing (Dale & Plunkett, 2017).
Which system to opt?
A service firm such as advertising agency which deals in planning and creating
advertisements shall opt for job order costing. This system will ease the ascertainment of
costs and helps in formulating laws and rules to control and regulate the job or unit that

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requires special assistance. The sick units and can be turned into a potential one (Kelly &
Shoemaker, 2017).
Under job costing method each unit of production or job is treated as an individual entity
which ultimately provides a detailed analysis of profitability, stability and independent
structure of each job (Beard, 2017).
A separate job cost sheet is prepared by the advertising agency and disclosure of online
advertising, television commercials mobile marketing is provided. On the basis of bill issued
to each activity separately, the labour charges are added and at last the overheads are
allocated to ascertain total expenditure. This gives a clear picture of each job order. The
customers can also be analysed differently.
Decision making information:
Decision making is an important aspect in every business and it becomes important to track
several costs which are variable in nature at the job level. It provides us valuable
information about what is the cycle time and profits earned individually and help in
detecting variances if any job wise or unit wise. This improves the decision making
process and evaluates the optimal opportunities.
However, the fixed costs are often included in the labour costs as overheads. This can
lead to misinformation thereby leading to bad decision making.
Likewise in process costing it simplifies record keeping and depends upon the calculations
which are statistical rather than actual inputs. This saves time and resources of the company
but follows with a fact that the costs cannot be traced directly.

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Activity based costing:
Activity-based costing (ABC) is a method of tracing and allocating overheads to
activities to further assign them to products or processes that consumes costs. ABC is
designed for complex environments consisting of machinery and equipment, and
entwines processes that are elusive to sort.
Examples where activity based costing are adopted over traditional:
Construction companies where prices of raw materials can fluctuate have high overhead costs
and therefore they need to adopt ABC method.
Secondly health insurance companies are prone to have high fixed overhead costs as there is
general rise in medical spending. Hence ABC method will be useful.
Lastly, the hospitals which work under complex structure tend to function under high
overhead costs. The increasing digital media and electronic transactions can minimise the
overheads using ABC approach (Cooper, 2017).
Decision making using Activity Based Costing:
ABC is a vital tool in analysing the profitability of the customer, the efficiency of the
processes where the cost can be calculated. Further the activities can be bifurcated and the
improvements can be made and benefits can be realised. The resources of the organisation
can be monitored and a balance can be created between expenses and consumption. This can
help the managers in deriving new policies, alter the existing product mix and work more
effectively and efficiently (Kim, 2017).

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Overhead rate methods and its usefulness:
Plant wide method:
Under this method the company allocates its manufacturing costs to objects or products. This
type of method is used where industries are smaller and with sorted cost structures (Haskins
& Rotch 2017).
Departmental Method:
This method is useful for the business which is into different product lines and diversified
business that require a large number of processes. It’s calculated on the basis of machine
hours of each individual department (Gantner, Held & Fischer 2017).
Activity based costing plant method:
The above method is required by industries dealing in manufacturing of steel and machinery.
This is useful in providing complete analysis of cost of each activity and can ensure
sustainable competitive edge in the global markets.
Conclusion:
After analysing the different costing methods, their usefulness and how they help in acquiring
information to be able to take accurate decisions it can be concluded that it depends upon the
type of industry. Different industries can adopt different methods to allocate costs and
apportion other relevant expenses on the business. Hence the costing method plays a vital
role not only in decision making but determining the overall performance of the business.

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Bibliography:
Beard, S. A. (2017). Modifying Managerial Accounting Tools for Microbusiness Practices.
Cooper, R. (2017). Target costing and value engineering. Routledge.
Dale, B. G., & Plunkett, J. J. (2017). Quality costing. Routledge.
Kelly, M., & Shoemaker, N. (2017). Lumberjack Construction: Job-Order Costing &
Manufacturing Simulation. Journal of Accounting and Finance, 17(5), 16-27.
Kim, Y. W. (2017). Activity Based Costing for Construction Companies. John Wiley & Sons.
Gantner, J., Held, M., & Fischer, M. (2017). Considering Uncertainties of Input Parameters
on Energy, Environmental Impacts and Life Cycle Costing by Monte Carlo
Simulation in the Decision Making Process. World Academy of Science, Engineering
and Technology, International Journal of Energy and Power Engineering, 4(2).
Parker, L. D., & Fleischman, R. K. (2017). What is Past is Prologue: Cost Accounting in the
British Industrial Revolution, 1760-1850.
Haskins, M. E., Rotch, W., Haskins, M. E., & Rotch, W. (2017). Shun Electronics
Company. Darden Business Publishing Cases, 1-7.