Why might an advertising agency use job costing for an advertising campaign by Pepsi, whereas a bank might use process costing to determine the cost of checking account deposits? How are these approaches similar? What importance to these results make to managers?
Job costing refers to an accounting system used to assign the costs of manufacturing to a single commodity or batches of commodities. This system is used only when the commodities produced are suitably different from one another. Due to the substantial variance in produced items, job costing method will generate each item with its own job cost record. This record will contain the direct labor and direct materials essentially utilized in addition to the manufacturing overhead allocated to an individual job. On the other hand, process costing is utilized when production entails large amounts of identical products such that an individual’s product cost cannot be separated from other product costs. In this system, costs are amassed over a given amount of time, abridged and finally allocated to every unit manufactured in the stated period at a constant rate.
An advertising agency might prefer to use job costing for Pepsi campaign because this campaign is more likely to be customized to meet the specific needs of the individual client. In this case, job costing will make it possible for all specific features of every job to be recognized. On the other hand, the method of handling checking account deposits is similar for almost all clients. Therefore, process costing is suitable since it can be employed to calculate each individual checking account deposit cost.
Job costing and process costing are similar since both have the same ultimate objective which is to identify product costs. In addition, they both have similar cost flows. Costs associated with labor, raw materials and overhead are recorded in separate accounts but are finally transferred to an inventory Work in Process account. Finally, both costing systems utilize predetermined overhead rates when calculating overhead.
Results obtained from job costing enable management to make sure that cost incurred during manufacturing are reasonable in comparison to prices charged to its customers. Were it not for job costing, prices quoted for some products could be too low making business to experience losses which it may not be aware of.
Boardman, A. E., Greenberg, D. H., Vining, A. R., & Weimer, D. L. (2017). Cost-benefit analysis: concepts and practice. Cambridge University Press.
by EssayRoyal, Nov. 6, 2019, 1:36 p.m.