Cost Estimation and Profit Planning 2
Introduction
Blocher et. al (2022) describes costing as the process of accumulating, classifying and
assigning direct materials, direct labor, and factory overhead costs to cost objects, which most
commonly are products, services, or projects. Companies use job costing and process costing
systems to track and allocate costs to products or services, but they are applicable in different
situations based on the nature of production or services. Process costing is an accounting
technique used to allocate and track production costs in industries where products or services are
produced in continuous, repetitive processes. Job costing is an accounting technique used to
track and allocate costs to specific jobs, projects, or orders within a business. It is particularly
useful for businesses that provide customized, unique, or non-standardized products or services.
Proverbs 21:5 says “The plans of the diligent lead surely to abundance, but everyone who is
hasty comes only to poverty” (ESV, 2001). This verse ties in well the costing processes as it
emphasizes the need for efficiency and proper planning.
Job and Process Cost characteristics
Job Costing
Fayek (2001) in an article classified job costing as a critical factor that provides a simple
yet effective approach to reporting costs against activities. Primary components of the technique
include job identification, cost accumulation, job cost sheets, overhead allocation and cost
allocation basis. Construction companies, manufacturing companies, law firms and healthcare
are a few of the industries that implore job costing. Some advantages of job costing include
precision, customization, and cost control and profitability analysis. Some disadvantages on the
other hand are the administrative burden it can present, the complex overhead allocation and cost
distortion.
Cost Estimation and Profit Planning 3
Process Costing
Galway (1991) in an article alluded to the fact that while process cost accounting sets out
to ascertain the actual costs of material, labor and overheads involved in the process operation,
the technique employed is not so straightforward as that in job cost accounting, where material
per job, labor per job, and overhead absorbed per job are added together to arrive at the
manufacturing cost of the job.
This includes direct materials, direct labor, and manufacturing overhead. Equivalent units
account for partially completed units in a given process and this helps in allocating costs
accurately. Firms employ process costing in industries where products or services are produced
continuously, such as manufacturing industries and service industries. Advantages of process
costing include accurate cost allocation, it simplifies tracking, standardizes products and
improves decision making. Some disadvantages are lack of precision, complexity in varied
processes, overhead allocation challenges and inefficiency tends to be ignored with individual
products as it focuses on process-level costs.
Examples
Job Costing Examples
Smith Construction specializes in building custom homes for clients. Each home project
is unique, with varying materials, labor, and specifications. They use a job costing system to
track expenses for each home construction project separately, allowing them to provide accurate
cost estimates to their clients.
A Creative Marketing Agency offers customized marketing campaigns to their clients.
They employ a job costing system to track the time, materials, and other costs associated with
Cost Estimation and Profit Planning 4
each client's campaign. Since each campaign is tailored to the client's needs, the costs can differ
significantly from one project to another.
Process Costing Examples
Sunshine bakery produces various types of bread and pastries using standardized recipes
and production processes. They use a process costing system to allocate costs to their products.
The costs of ingredients, labor, and overhead are accumulated by the bakery department, and
these costs are spread across all units of bread and pastries produced during a specific period.
ABC Refinery in the community refines crude oil into various petroleum products like
gasoline, diesel, and lubricants. Since the refining process is continuous and the products are
relatively uniform, they employ a process costing system. Costs, such as raw materials, labor,
and maintenance, are allocated to each gallon of refined product produced during a specific time
frame.
Cost Estimation and Profit Planning 5
References
Blocher, E., Juras, P. E., & Smith, S. D. (2022). Cost management: A strategic emphasis.
McGraw Hill.
English Standard Version Bible. (2001). ESV Online. https://esv.literalword.com/
Fayek, A. R. (2001). Activity-based job costing for integrating estimating, scheduling, and cost
control. Cost Engineering , 43(8), 23–32.
Galway, A. (1991). Process cost accounting – methodology. Management Decision, 29(7).
https://doi.org/10.1108/00251749110007210
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