Week Three Discussion Questions
Week Three Discussion Questions
This can be defined as the process whereby the cost of goods produced is calculated in large quantity for those goods that are similar. This method entails the calculation of costs based on the period the products are being produced (Kaplan & Anderson, 2007). For instance, a company might be producing the same products to its customers. This means that the processes of producing these products are the same, that is, they are repetitive. Therefore, this method can be described to calculate costs of those identical products that are produced in bulk and their process of production is repetitive.
The organizations that are supposed to use this method are those that are manufacturing similar or identical products. Additionally, the processes of producing these products should be repetitive. This means that the products are made one after the other using the same process. Lastly, the organizations using this method should ensure that their sole purpose of business is manufacturing these products and later selling them to the customers when they are finished products.
The differences between this method and other methods of costing are that this method only caters for identical or similar products. For instance, job order costing is used to calculate the cost of production of a certain order. This order is not similar to the other products produced in the company. Therefore, process costing is for the calculation of cost of those products that are similar while job order costing is for the calculation of costs of those products that are not similar. Additionally, the point at which costs are totaled is different from the rest of the methods (Garrison, & Noreen, 2000).
A good example of process costing is a company producing the same type of chairs. For example, the company might need ten workers being paid $5000, two hundred pieces of wood costing $1000, five hundred meters of cloth costing $2000 and five hundred screws and nuts to fix the chairs costing $500. The chairs are made using the same process where the frame is first made and the cloth is then fitted to the chair. These costs are added together to come up with the total sum of costs incurred in production. The aim of calculating these costs is for pricing purposes, cost control, inventory valuation and financial statement presentation.
A good example of a company that will use a process cost system in calculation of the product cost is the oil producing industries. In this case, the industry will have to keep on implementing the method based on the process of production. If the process happens to change, then the method of costing should be implemented. Therefore, the processing cost in a company is implemented based on the process of production. If it changes, a process cost system has to be implemented.
A good example of a company that uses job order costing as the method of calculating cost of production is the printing company. This company usually works according to the number of orders issued. Additionally these orders are not similar; thus, they do not follow the same production process. For this reason, the job order costing for each order is different. This means that every time there is a new order, the job order costing method has to be implemented to suit the new order.
There are some industries that do not use either job order costing or process costing. A good example of these industries is the service industry; for instance, the insurance companies. This is because they do not produce anything to their customers but they offer the insurance services. However, these companies do incur costs in the process of delivering their services to the customers. The best method to use in calculating the cost of production is the activity-based costing method (Geri & Ronen 2005). This is where each an every activity spent in providing the insurance services is calculated as cost incurred.
As the manager of the company, I would suggest the firm to adopt the new method. This is because many resources are wasted in the current system in other departments while other departments are oppressed. For example, the fabricating department will be oppressed since it requires many of the resources while the assembly department is wasting the resources since it does not require much. Another cost driver is time. The time spent in using the different resources by the different departments varies. Therefore, the department that uses maximum time should be allocated more costs. The other cost driver is the amount of work done. The department that has a lot of work to be done should be allocated with the highest costs. In the case of the above scenario, the fabricating department appears to have many employees meaning that the rate of work done is high. Therefore, they should be allocated with the highest cost as compared to the other departments.
The business chosen is the sole proprietorship where the funds or capital is coming from the government. In this case, the best mode of calculating the cost of production is job order costing. This is because in a sole proprietorship, there are many different goods that are being produced. Additionally, sales are done based on order since it is a small business. Therefore, the best mode of calculating cost will be job order costing.
Garrison, R. H., & Noreen, E. W. (2000). Managerial accounting. Boston: Irwin/McGraw-Hill.
Geri, N. & Ronen, B, (2005). Relevance Lost: The rise and fall of Activity-Based. New York, NY: IOS, Press.
Kaplan, R. S., & Anderson, S. R. (2007). Time-driven activity-based costing: A simpler and more powerful path to higher profits. Boston: Harvard Business School Press.