M1 Unit 4

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Discussion Assignment Unit 2
Please identify a company that you believe would use job order costing and another company that you believe would use process costing. Identify a third company that uses activity-based costing allocations. Discuss why each might use the method you identified with them. Compare and discuss the similarities and differences you see in the companies.

According to Collier (2019) job order costing accumulates the cost of raw materials as they are allocated against each job (either a customised product or a product batch) with the cost of labour. Overheads are then allocated to each to cover the variable and fixed costs that are not included in the materials of direct labour costs. For customised products the accumulated …show more content…
Under process costing, materials are issued to the different stages of production. However, unlike job costing, as labour costs cannot be allocated to continuously producing products, process costing uses ‘conversion costs’ which include the production labour and overhead. In process costing equivalent units measure resources used in the production as a percentage of the required resources to finalise all units. However, like job costing, overheads are calculated using an arbitrary method as opposed to a cause and effect method used by ABC costing. Documentation must show the quantity of material issued as it moves from raw materials to production, and timesheets which show hours worked in production labour in converting raw materials into finished goods. This is different from job costing which will report work in process at the end of the month in terms of value of materials used and the value of …show more content…
Commonly used by financial services, or services industries (Al-Omiri and Drury (2007), activity-based costing attempts to divide production into core activities (unit-level activities, batch-related activities, product-sustaining activities and facility-sustaining activities) which it then costs, as a basis for assigning these costs in the making of products. The ABC method aims to address perceived gaps in the traditional costing methods which divide product and period costs – by seeking direct links between activities, costs and products, and only costing products based on the cost of capacity used (i.e. idle capacity is not charged). Because external reporting rules require absorption costing (where product costs and period costs are separated and with absorbing manufacturing costs and not period costs) this can mean that results are misaligned with generally accepted accounting principles, and actually require two accounting costing methods and systems – which can be complex and costly. (Walther and Skousen, 2009). ABC uses cost pools (say purchasing or scheduling) to accumulate the cost of major activities and then assigns these to products or services, based on cost drivers which measure the actual demand. Examples of cost drivers in a purchasing department
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