Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 17

Why might two companies in the same industry have different cost systems?

Step 1 of 2

Cost accounting system

It is a system designed to report the cost of products and services. Material, labor and overhead costs are allocated to determine unit costs. Cost accounting system comprises of various types of formats, forms, procedures, reports and records. This can be maintained independently and can be part of formal accounting system also.

Cost accounting systems are used by both manufacturing and service firms to find the unit costing of their products or service. There are two types of cost accounting systems like job order costing system used for personalized products or services and process costing system used for large size of identical products. Some companies may use combination of job order costing and process costing system to fit its particular needs.

Job costing system

Job order costing is used for personalized products or services to fulfill some particular orders or a common stock may be created to meet the demands of future customer orders.

The companies using job order costing system shall include manufacturing, hospitals, printing, construction etc. Cost of direct material, direct labor and manufacturing overheads are added separately for each product or job order.

Process costing system

Process costing system is used for large size of identical products manufactured in a uninterrupted flow of activities for example oil, cable etc. Production department gathers direct material, direct labor and manufacturing overheads for particular period and then divide the total cost by the number of units manufactured for that period to arrive at unit cost. Companies with power or chemical plants having mass production operations or companies with assembly line operations like flour mills shall use process costing systems.

Operations costing

This is a hybrid costing system that has characteristics of job costing and process costing. Some companies use operation costing for their processes. Purpose of this costing system is also to provide information to managers about the cost of products and services for decision making. Standard production methods are used in operation costing to produce goods but different material can be used for different products. For example paining trucks and cars in same assembly lines.