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Done BUS 5110 Written Assignment 2

This document discusses three costing methods - job order costing, process costing, and activity-based costing. It explains what each method involves and the types of companies that might use each one. For example, job order costing tracks costs for unique, custom products while process costing is used for high-volume, identical products. The document then analyzes which costing method would be most suitable for a company called Wet Suit World based on the details provided. It determines that process costing would work best given the company produces similar wetsuits at scale.

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Djahan Rana
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283 views

Done BUS 5110 Written Assignment 2

This document discusses three costing methods - job order costing, process costing, and activity-based costing. It explains what each method involves and the types of companies that might use each one. For example, job order costing tracks costs for unique, custom products while process costing is used for high-volume, identical products. The document then analyzes which costing method would be most suitable for a company called Wet Suit World based on the details provided. It determines that process costing would work best given the company produces similar wetsuits at scale.

Uploaded by

Djahan Rana
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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BUS 5110 Written Assignment Unit 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

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

production of product. Apple is an example of a company that uses Activity-Based Costing.

Costing Method for Wet Suit World

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

produce the same garment on a large scale.

Word Count: 705

Bibliography:

Bragg, S. (2019). Costing Definition. Accounting Tools. www.accountingtools.com

Walther, L. M. & Skousen, C.J. (2009). Managerial and Cost Accounting. Bookboon.com

Lister, J. & Seidel, M. (2019). What Kind of Business Can Use Job Costing?. Chron.

smallbusiness.chron.com

Bragg, S. (2019). Process Costing. Accounting Tools. www.accountingtools.com

Kenton, W. (2020). Activity-Based Costing (ABC), Investopedia. www.investopedia.com


Woodruff, J. (2019) The Disadvantages & Advantages of Activity-Based Costing. Chron.

smallbusiness.chron.com

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