This unit refers to job-order, process, and activity-based costing. Companies can be divided into two major types, depending on whether or not their products/services are unique. Manufacturing and service firms producing unique product or services require a job-order accounting system. On the other hand, those firms producing similar products or services can use a process-costing accounting system. In a job-order costing system, the cost of one job differs from the cost of another and must be accounted and accumulated by job, whereas with a process-costing system, all jobs are similar and are accounted and accumulated by department. The following is a comparison of job-order and process costing systems:
An activity-based costing (ABC) system is a two-stage process:
- Trace costs to activities.
- Trace costs to cost objects.
The underlying assumption is that activities consume resources and cost objects, in turn, consume activities. An ABC system, however, emphasizes direct tracing and driver tracing (exploiting cause-and-effect relationships), while a volume-based costing system tends to be allocation-intensive (largely ignoring cause-and-effect relationships). Since the focus of ABC is activities, identifying activities must be the first step in designing an ABC system. An activity is action taken or work performed by equipment or people for other people. Identifying activities is usually accomplished by interviewing managers or representatives of functional work areas (departments).
- Differentiate between characteristics of job-order and process costing
- Record cost in the job order system
- Cultivate activity based costing and management
- Use quality costs to make decisions