Operational Accounting Systems

Operational Accounting Systems

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Operational Accounting Systems

Job costing is the method of accounting that tracks both costs and revenues by job and allows standardized reporting of profitability in terms of job (Hansen & Mowen, 2006). It involves determining the costs of labor and materials for every job in a systematic way thereafter using the information to develop a quote for the consumers. In order for an accounting system to support job costing, the system must be able to assign job numbers to every item of expenses and revenues. Job costing can be applied in almost every industry but more specifically the service industry. This method would ensure that the product and service pricing covers actual costs and overheads and at the same time provides profit. Every business’ main purpose is making profits and job costing is the most effective means of ensuring a business makes profit. Applying job costing in the manufacturing setting is also common. This is because job costing tracks the kind of jobs that use various types of direct expenses including direct labor and direct materials and then allocating costs of overheads such as indirect labor, quality control among other overhead costs to the jobs.

Process costing is a method of accounting that traces and accumulates direct costs as well as allocates indirect costs of a manufacturing process. It is a type of costing operation that aims at ascertaining the cost of a product at every process or manufacturing stage. Here, costs are assigned to large batches of products produced after a given period. This costing method is more applicable where goods and services are produced as a result of a sequence continuous or repetitive processes or operations. The costs incurred are averaged over the number of units produced during the specific period. This process is mostly used in the manufacturing industries such as companies that manufacturing automobiles or loaves of bread. They prefer this method since these companies continuously produce masses of same units through a series of processes or operations.

Standard costing involves substitution of expected costs for actual costs in the records of accounting and recording variances periodically that shows the difference between the actual and the expected costs. It involves establishment of estimated costs, standard costs, for all or certain activities within the company. The variance comes as a result of cost changes from the estimated amounts or changes in quantities from the amounts expected. This approach is a representative of a simplified alternative to various cost layering methods like the LIFO and FIFO methods which require maintenance of large amounts of information of historical costs. Standard costing is mostly used by manufacturers in the manufacturing industry. They use this method so as to carefully plan the expected costs in the upcoming budgeting year and then make a comparison between the actual cost and the planned costs. The cost variance obtained enables the managers to practice management by exception through directing the attention of the management to the areas with problems.

Direct costing refers to a specialized form of analyzing costs by using only variable costs in making decisions (Langfield-Smith, 2009). This method does not consider fixed costs as they are assumed to have an association with the period of time that they were incurred. This concept of direct costing is mostly useful for making short-term decisions and may be lead to harmful results if used in making long-term decisions as it does not include all costs associated with long-term decision making. Direct costing is mostly used by internet based companies that handle transaction with customers electronically. These companies require direct costing to trace product advertisements and service costs back to the customer. This method also allows them to divide their organizations into the support and operating departments.

Throughput costing is a costing approach where only direct materials are considered to be inventory costs whereas all other manufacturing costs such as direct labor, variable factory overhead and selling and administrative costs are considered expenses of period costs. It is therefore, cash focused tool that does not allocate all costs to products and services provided and sold by an enterprise. Adelphia Corporation in Greenwood Village is one of the organizations that use throughput accounting. This is because it improves the performance of the organization in terms of profit by improving management decisions by using measurements that reflects more closely the effects of decisions on operating expenses and investments.

Activity-based costing is a method of costing that identifies organizational activities and assign the cost of every activity with resources to every product and service on the basis of actual consumption by each (Langfield-Smith, 2009). ABC can be used in estimating the cost of elements of an entire product, service and activities. This method of costing is applied by manufacturing industry, businesses, finance and accounting sector since it allows them to identify and eliminate services and products that lack profitability and instead lower the price of overpriced products and services. It also enables companies to identify and eliminate processes of production and service delivery that are deemed ineffective.

Target costing is an approach that determines the cost of a product’s life-cycle which is considered sufficient to develop specified quality and functionality and ensuring the desired profit (Hansen & Mowen, 2006). This approach involves setting a target cost through subtracting a desired profit margin. Therefore, a target cost is the maximum amount of cost that a business can incur on a product while the firm still achieves the required profit margin from the product at a given selling price. The focus of target costing is not minimizing costs but rather achieving a desired level of reduction in costs. Target costing is used by Ford motors, Nissan, Toyota and American motors. It is preferred because it helps the companies reduce costs and increase productivity.

References

Hansen, D.R. & Mowen, M.M. (2006). Cost Management Accounting & Control. Ohio:

Thomas South-Western.

Langfield-Smith, K. (2009). Carolyn Leslie, ed. Management Accounting: Information for

Creating and Managing Value. Australia: McGraw-Hill.