Done BUS 5110 Written Assignment 2
Done BUS 5110 Written Assignment 2
The process of costing is used to assign a cost to different aspects of a business such as products,
employees or processes (Bragg, 2019). There are three different costing methods used to
determine the cost of a product depending on the product being produced and how the company
is producing the product. The three different costing methods that will be compared are job order
costing, process costing, and activity-based costing. These costing methods are depending on
both fixed and variable costs associated with the production of the product. During the course of
this paper, the costing method most suitable for the company Wet Suit World will be determined.
Job Order Costing is where each individual cost associated with a job is tracked and itemized to
determine the direct cost of the product being produced (Walther & Skousen, 2009). Specifically,
the companies are tracking the labor costs, the material costs, and the manufacturing costs (Lister
& Seidel, 2019). This costing method is primary used for small batch product production or in
circumstances where each product being produced is highly customized such as bespoke pieces
of jewelry. The companies that use this method are primarily producing product to fill orders that
are unique (Lister & Seidel, 2019). This method would not be used for high volume production
of the same product with the exact same specifications or in situations where activities related to
product production where a substantial cost associated producing the end product. A great
example of a company who uses the Job Order Costing Method is Boeing Airplanes (Lister &
Seidel, 2019) .
Process Costing
The Process Costing Method is used by companies that “produce homogeneous products in a
continual process”, usually in on a high volume manufacturing scale (Walther & Skousen, 2009).
Examples of a products that would be produced in this fashion are a nails, tiles, screws, gasoline
and paperclips. This method is used in situations where determining the cost of an individual
item is hard to differentiate compared to the other identical items being produced and it is
assumed that the cost of producing the identical items is the same (Bragg, 2019). In order to
determine the costs associated with the product, the company takes a snapshot of the costs
associated with the production of a certain amount of items (cost pooling), over a fixed period of
time, and then the output costs are shown as aggregated quantities (Walther & Skousen, 2009).
This costing method would not work in a situation where each product being produced was
highly unique such as a custom home. It would also not be a good method to use where activities
or over-head costs made up a substantial portion of the overall costs associated with product
production. Chevron Corporation is an example of a company that uses the Process Costing
Method.
Activity-Based Costing
Activity-Based Costing consist of factoring the costs associates with the activities that support
the production of the product over and above labor, material, and manufacturing costs. These
activity costs are referred to as overhead or indirect costs and examples are office maintenance,
staff training, and client development (Walther & Skousen, 2009). Activity-Based Costing is
thought to be the most accurate costing method because it takes into account the direct and
indirect costs associated with producing a product (Kenton, 2020). Activity-Based Costing can
be used to make accurate pricing decisions by taking into consideration overhead and cost
drivers. This method is a very time consuming and costly costing method and is dependent on
data that isn’t always available (Woodruff, 2019). This costing method should not be used by
companies who have very low overhead costs in comparison to the costs associated with the
I would choose the Process Costing Method to determine the cost associated with the production
of the wetsuits described in the assignment. I chose this method because each individual item is
not being customized and there was no discussion relating to high cost associated with overhead
in the company. The Process Costing Method is commonly used in the textile industry to
Bibliography:
Lister, J. & Seidel, M. (2019). What Kind of Business Can Use Job Costing?. Chron.
smallbusiness.chron.com
smallbusiness.chron.com