What are the job-order, process, and activity-based costing systems?
As has already been said, these are 3 costing systems used selectively and in combination to suit different styles of business or to deliver a different focus or perspective view on a company's costs.Costing systems are basically (and unsurprisingly) used by companies to determine the cost of a product, such that the relationship to the revenue generated can be established and reports or quotes generated. The costing system/s chosen will each provide a different focus and perspective. A company may wish to provide a multi-focal view for several reasons, such as for COGS reporting or for generation of a comprehensive quote for service. So in a job (or "job-order") costing system, the cost of one job differs from the cost of any other and must therefore be accounted on a per job basis; With a process-based costing system, all jobs are similar and are accounted for by department;And in an activity-based system action is taken or work is performed by people and/or equipment and is accounted for per activity. It may be that a business will need to use job or process costing for a product or service-based quote and then add on an activity-based "burden" to cover non-manufacturing "overheads". Wikipedia may help explain further: Job costing
Activity-based costing?
Activity based costing tries to account for the cost of an item through the activities which go into making it. For example, if I am making a hammer I have to source the metal, forge it into a hammer, finish and polish it, put a handle on it, package it, and ship it to the point of sales. Activity based costing would assign costs to each of these various process and attempt to track them separately so that you could see which particular part of the process was saving money, or spending money over their budget. It has the advantage of focusing your attention on various parts of an overall cycle, so you can hopefully make improvements where needed. The big disadvantage is that you can put allot into it by breaking the process into more and more activities. The more detailed you are the more information you have, and the more you have spent tracking it. In the end if you don't use the information you have just spent allot of money on nothing.
What are the advantages of activity-based costing (ABC)?
Activity-based costing is a helpful method to figure out how to charge your clients properly, especially when you’re challenged to take into account indirect costs. After identifying actual resources usage and how to allocate them, you can discover “true costs” of individual products and services more precisely.The benefits of ABC:figuring out if specific products or projects are unprofitablebetter understanding of resources management or production methodsmore accurate product or service cost informationdiscovery of unnecessary costs that can be eliminated / optimisedand finally - improvements in reported margins and profitabilityIf you need a real life example form a custom software company background, check out this blog post: How to set a good rate for your clients.The two methods are described:a naïve, where the indirect costs were divided equally between projects by the number of developers working on them.the ABC, that emphasis a better understanding what are the cost drivers for various costs, and then talks how to divide them better. Some of the results are quite interesting.
[BUSINESS] What is the difference between zero based budgeting and activity based budgeting?
Budget is a tool used by the management to do planning and evaluation of organizational activities to ensure those are in order to achieve their stated goals and objectives. Budget can be prepared for short terms (eg: annual or quarter) and long terms (eg: strategic plans). Based on the preparation method and purpose budget is classified in different waysActivity-based Budgeting — Management identifies the actives of the organization which leads t the revenue generation and allocate the resources based on their needs. Like activity-based costing, management should indentify the cost drivers in each activity and allocate resources based on the past experience. This method is mostly used where overhead costs are a significant proportion of operating costs.Zero based Budgeting – Management identifies all the cost elements for each year newly and prepares the budget accordingly. It does not refer the previous year’s budget or actual expenses. Each time it can be started as fresh. Mostly, the newly started firms and project oriented companies use this budgeting method.Major difference in these two budgeting method is an activity based budget use historical data (previous year’s budget or actual expenses) but Zero budget does not consider these data.
How is Activity-based costing (ABC) useful for pricing decisions?
Activity Based Costing / Management / Analysis is based on tracing ALL expenses / costs to products / processes / customers. I use it for analysis as part of a consulting business.Unlike accounting methods of using percentages of unrelated costs for “absorption” and “allocation”, it actually goes to the cause of the consumption of the costs much as one would assign raw material costs to a product. I include tracing all “general and administrative” costs to processes and products to the extent they consume those expenses.Terms like Cost of Goods Sold, Gross Margin, General and Administrative Expenses and so on do not exist under ABC.Profit becomes the only measure used for management decisions. I must emphasize, that using “Gross Margin” is among the worse offenses of management measurement of product / customer “Profit”.What it gives you is far more accurate costs and ability to plan. It will often reveal that those products and customers considered most profitable are the reverse. It lets you adjust your product mix for growth and proper investment.I do not beleive in a system that is continuous, just annual updates.
What are the advantages and disadvantages of drop forging?
There are various forging companies in India. With the help of the drop forging process, it can produce a piece which is stronger than an article produced by utilizing the cast or machined part. As the metal gets its shape when it undergoes the forging process, the deforming of internal grain texture to bring back the general form of the region. So as its results, the variation process of surface keep on going throughout the part, it also helps in improving the characteristics and features of that piece. Moreover, forgings mainly target a lower total cost while comparing to a casting or fabrication. Counting all the values that are involved in a lifecycle of a product from procurement to rework lead time, and also considering the costs of downtime, scrap and further issues related to quality, the benefits of forgings which are deemed to be long term can outweigh the cost-saving short term which castings or fabrications might offer.
Accounting question help please?
What are the shortcomings of traditional accounting costing techniques that activity based costing is supposed to reduce? Are there any negatives or caveats from using activity based costing?
What are the advantages and disadvantages of MICR?
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