Question & Answer: What are the advantages and disadvantages of Job Order and Process Costing? State and outline what type o…..

Advantages of Job order costing: 1) It helps management to detect which jobs are profitable and which are not. Estimates of cost for similar work in the future may be conveniently made on the basis of accurate record of job costs. This assists in the prompt furnishing of price quotations for specific jobs. 2) The cost of materials, labour and overhead for every job or product in a department is available regularly and periodically, enabling the management to know the trend of cost and thus by suitable comparison to control the efficiency of operations, materials and machines. 3) The adoption of predetermined overhead rates in job costing necessitates the application of a system of budgetary control of overheads with all the advantages. 4) Spoilage and defective work can be easily identified with specific jobs or products so that responsibility may be fixed on departments or individuals. 5) Job costing is particularly suitable for cost plus and such other contracts where selling price is determined directly on the basis of costs. Note: Job cost information can be used for estimation of future costs only after careful adjustments for variations likely to arise over time as well as for any difference in the size of the order. Disadvantages of Job order costing: 1) It is said that it is too time consuming and requires detailed record keeping .This makes the method more expensive. 2) Record Keeping for different jobs may prove complicated. 3) Inefficiencies of the organisation may be charged to a job though it may not be responsible for the same. Advantages of Process costing: 1) Costs are computed periodically at the end of a particular period. 2) It is simple and involves less clerical work to that of job costing. 3) It is easy to allocate the expenses to processes in order to have accurate costs. 4) Use of standard costing systems is very effective in process costing situations. 5) Process costing helps in preparation of tender, quotations. 6) Since cost data is available for each process, operation and department, good managerial control is possible. Disadvantages of Process costing: 1) Cost obtained at each process is only historical cost and not very useful for effective control. 2) Process costing is based on average cost method, which is not that suitable for performance analysis, evaluation and managerial control. 3) Work in progress is generally done on estimated basis which leads to inaccuracy in total cost calculations. 4) The computation of average cost is more difficult in those cases where more than one type of product is manufactured and a division of the cost element is necessary. 5) Where different products arise in the same process and common costs are prorated to various costs units. Such individual product cost may be taken as only approximation and hence not reliable. Types of companies using process costing system and the reasons they use it for: Process costing is used in industries like Chemicals, Textiles, Steel, rubber, sugar, shoes, petrol etc. Process costing is also used in the assembly type of industries also. Process costing is a form of operations costing which is used where standardized homogeneous goods are produced. Process costing is being used by following industries as under: 1) Identical products industries Process costing is most often used when manufacturers release identical products. If mass produced televisions have the same parts, manufacturers can assign consistent prices to the products based on how much the products cost to the manufacture overall. 2) Industries with multiple departments Businesses that have multiple departments usually use process costing so that management can assess the costs accumulated by each department. For example, one department can take the raw resources and refine them before turning them into finished parts, another department can assemble the parts and third department can test the finish the product to assess the quality and safety. 3) Industries with interchangeable parts Process costing comes into play when a factory manufactures identical parts. For example a computer manufacturing plant will create numerous components that are interchangeable among computers of the same model. Process costing allows manufacturers to sell individual parts separately to computer repair shops or individual buyers, since the manufacturers know the cost of the separate parts. 4) Industries with varying product features Products that have multiple extraneous features can benefit from process costing. Manufacturers can release two versions of the product, with one version costing less but having fewer features and another product costing more but having more features. 5) Innovative industries Process costs are important in industries that have high innovation.For example, manufacturers cannot determine an appropriate price for a new type of product without knowing how much the product will cost to manufacture overall. In addition, businesses cannot determine if a product will be profitable until then they know the overall cost so they can estimate the maximum price that the customers will pay for the product.