Job costing is also known as specific order costing. It is suitable if it is possible to identify separately cost units of each job. Thus, after identifying a job it becomes possible to cost it individually. The job should be of a reasonable size and only relevant costs are included. It can be applied in contract costing, where, each contract is considered a different job and all costs incurred in respect to the contract are charged. Therefore, profit of the contract will be the difference between the contract price tag and the cost. This is commonly applied in auto repair shops and construction companies for example, when constructing: a bridge, dam or a road.
On the other hand, process costing is applied when cost unit are to be passed through a series of activities before final product is got. Therefore, output of one process may form one of the inputs of the next process. Thus, all direct and indirect costs are charged to each process. It is the best process to be applied in chemical, paints and soap industries.
An auto repair shop had the following information pertaining cost of servicing a motor vehicle: labor $20 per hour which includes overhead costs. This means that the management should always charge the customer more than $ 20 per hour for servicing a vehicle. In addition all other costs of spare parts should be met by the customer.
The process costing is the most suitable costing method for the chemical industry. To affectively implement this cost system, all direct costs for each process should first be identified. This include cost of labor, direct raw material e.t.c . The company should then come up with formulae of absorbing over heads. For example, it can use percentage of direct labor or raw materials. However, the formulae for absorbing over heads should try as much as possible to equitably distribute over heads to processes. There is no industry which can use both methods of costing because in job costing, very many different jobs are performed where each job has very different production requirements. While, in process costing only a single product is produced which under goes several stages before final product is got. Therefore, a company should carefully analyze its production process as well as its final product before selecting the costing method to use.
The company should use activity driven cost allocation method and avoid equal sharing of costs. This is to make sure that departments are charged costs according to extend in which they benefit from support departments. It is illogical to allocate equal costs to all departments because this will not give a true picture of individual department costs. To allocate costs of human resource department should be allocated according to number of employees in each of the manufacturing department. This is because the cost for labor of each of manufacturing department is proportional to number of employee. However, the costs of the purchasing department should use cost of raw material in each of the manufacturing department but not the number of employees. The data of cost of raw material is can easily be obtained in supply department. In addition, the cost of holding stock, ordering e.tc is likely to increase as cost of raw material increases. Labor cost can also be used to allocate the costs to the manufacturing department especially the costs from human resource department. This is because this data can be obtained from the human resource department easily, the cost is has a close relationship with the base.
Job costing is a suitable costing method for sole proprietorship. This will simplify the process of determining whether the business has raised a loss or profit after completion of the job. For example if the sole proprietorship is for auto shop, the customer will be charged according to costs associated with entire expense associated with servicing his car. This makes it impossible for under quoting the price to charge a client. Hence, the business will not in any way undercharge its services to get a loss. It is also very simple to identify all the costs associated with every client’s job.
The job costing system is suitable to my comrades catering business. This is because each outside or inside catering job given to a client has its own costs. Therefore, it is suitable to allocate all this costs to its job in determining whether taking a certain job from the client will earn the business either a profit or a loss. Process costing is however recommendable for clients who come personally to the hotel. This is because one meal is composed of several processes in its preparation.
The above questions have helped me to know which method of costing to use for different types of activities or else industries. In addition, I have also learned the similarities and differences between job coting and process costing (this help in determining whether to use job or process costing). Question three, has helped me learn how to allocate costs of service department to manufacturing department. This allocation makes use of cost drivers so as to enhance equity in the allocation process.