Importance of cost and management accounting methods

With the changes in economic condition and complex business structure, each and every organization needs to adopt proper cost and management accounting methods to record the business transactions. It is analyzed that entity which has commenced a business or is doing a business has to calculate the costs that are incurred in the business activities. Different methods of computing and accounting the costs are used by different entities. Some prominent methods being the job costing method, process costing method and the hybrid costing method.  Cost is the total amount of expenses incurred for the particular project. There are several business houses that are in the activity of different production use different costing method due to the different kind of activities involved (Kaita, & Lim, 2018). There are several examples of job costing methods such as cotton textile production, oil refining industry, chemical processing industry, paper manufacturing industry, and etc. (Noreen, Brewer, & Garrison, 2014). In this report, Pental Company has been chosen to evaluate the costing system of organization.

Pental Company is in the business of selling customized chemicals and other substance focuses on household chemicals and substances manufacturing for its client. It is not only indulged in household chemicals manufacturing and substances, but it is involved in the production of other chemicals, granite and marbles Pental business is indulged in production of minerals and rocks, mainly Quartz, bound with resin, pigments and other fillers. This company is indulged in using the technology from Breton machinery of Italy.

The process costing method is relevant for the production of units that are widely homogenous and are produced in bulk. In this kind of costing method the units that are produced are all of same kind and there is no difference. This is specifically the case of those industries where the production comes out to be the result of a defined process. As far as the processing activity of household chemicals and substances production is concerned, the most appropriate methods stand to be that of process costing. The process costing method as discussed above works well with mass and homogenous production. The manufacturing of household chemicals and substances is a complete process that involves production of homogenous chemicals and other hazardous substance as a basic production. Herein, in this the raw material is all processed to convert it into a finished product. A series of processes are involved, but all they end up in the production of a homogenous final product. The company is able to compute costs at every step involved in the production process (Monroy, Nasiri, & Peláez, 2014).  When the cost at different steps is worked out by the company, and every possible way of curtailment is edged out. The production completed at every step is able to be defined a cost for and can be treated as a final product already for a different market. However, the product generated after the end of all the steps stands to be the most expensive of all. This way, the processes are defined with proper costs and are able to be provided with a clean scope of cost reduction. So this is the best method as long as the production consists of different processes whose outcome turns to be same (Becker, Wald, Gessner, & Gleich, (2015). This example has reflected that how well company could use the process costing method to records the cost of the different process.

Costing methods and their suitability for Pental Company

The crux of the whole discussion is that, every company needs to follow costing method that helps in maintaining cost sheets. The process costing method is relevant for the production of units that are widely homogenous and are produced in bulk. It is used for the distribution of costs as per different costing methods in different costing formats to make the most suitable decisions for upcoming operations. Pental Company which is incurring cost needs to record costing in appropriate manner. So by customising the costing method after adopting process costing method, cost sheets are prepared for the different process or business houses to record the costing of different process. It could be inferred that company needs to properly use these methods and matching concept while recording the transactions in the business costing process.

The job costing method works on individual job works that are required in the production of a process. The costing of every job connected with a production is computed separately and it is worked out later if the cost related to a certain job is reduced to get an overall decrease in the total cost of the company. The job costing method is mostly suitable for construction of airplanes and bridges, production of movies, and other types of busienss. This method of costing is relevant for the non-homogenous nature of tasks which is undertaken for the company indulged in bridges, production of movies, and other types of busienss (Zahller, 2017). For the job costing method, companies in the business of construction are admired for this type of costing method. The reason is simple; this method helps the company in estimating the cost of every job that is involved in the process constructions and building blocks. This way the company is able to get an idea of the costs that every job involved in process constructions and building blocks. (Langfield-Smith, et al. (2017).  Later on the company can ascertain the jobs which are adding a lot burden to the cost sheets of the company. That makes the job costing method the perfect alternative to compute the costs for a process constructions and building blocks… The process constructions and building blocks are all heterogeneous and customised. There is no mass production even. So the rest two methods of process costing a hybrid costing get eliminated because of this reason. So, the job costing method comes out to be the most appropriate for the process constructions and building blocks. Further this technique of costing works out the cost of by-products also (Kaita, & Lim, 2018).

Job costing method

The hybrid costing method is one that combines the elements of both the job costing method and the process costing method in Organizaiton. This is the case when the company does production on mass basis and also on customisation at the same time. The best example that can be cited for hybrid costing is of a company that manufactures bikes and other busienss organizations that uses a same frame (Kaita, & Lim, 2018).  This way the company is able to help itself out in reducing cost from the jobs that are not required. There are other several examples which could be undertaken in the job costing process and methods. Nonetheless, hybrid costing is method used to identify the right choice to determine the costing of the process of producing bikes and other motor vehicles.

When the production is initially the same, but is finally customised into different styles and patterns as mentioned in the example of bikes discussed above, the hybrid costing is what required. This cost helps the business concern to allocate the common costs of production to the same levels of production and the specific costs incurred on the customisations to the specific customised products (Miller-Nobles, Mattison, & Matsumura, 2016). This eliminates over charging of costs as well as helps in calculation of appropriate cost sheets. The productions that have similar characteristics for production get the share of common costs and the customisations are separately charged (Monroy, et al. 2014).

The costing systems used as per the specific requirements that a business needs to deal with takes the business a long way in making those decisions that lay the foundation of long term success of the entity and the achievement of goals that helps in monitoring the business requirements. The decision making gets easier and much controlled as a clear picture is available to the management regarding the areas that are way ahead of others in grasping the costs that the whole entity is incurring in its operations. A blue print kind of sheet is laid in front of management’s eyes that help them to understand the manner in which the activities for future are to be planned to achieve economies of scale and increase the quality that the customers are getting as well as reduce the costs that the business has to face. It is easier to make budgets now (Becker, et al. 2015). The company can formulate budgets for different periods that help it to monitor the activities as per the budgeted ones. By comparing the actual performance with the budgeted performance, it becomes easier to identify the variances. The identified variances can help the company to formulate new strategies to make up for the performance difference. Further, it gets much faster to analyse the areas that need a change in order to overcome the dilemmas that lies in decision implementations (Fisher, & Krumwiede, 2015). This ensures that the data available is reliable as well as correct. The given method helps the company in estimating the cost of every job that is involved in the manufacturing of household chemicals and substances manufacturing.

It is reflected that job costing method works on individual job works that are required in the production of a single product. Now in the end, it could be inferred that company should use process costing method in recording of the costing.

Reference

Becker, S. D., Wald, A., Gessner, C., & Gleich, R. (2015). The role of perceived attributes for the diffusion of innovations in cost accounting: The case of activity-based costing. Comptabilité-Contrôle-Audit, 21(1), 105-137.

Fisher, J. G., & Krumwiede, K. (2015). Product costing systems: finding the right approach. Journal of Corporate Accounting & Finance, 26(4), 13-21.

 Kaita, S. M., & Lim, F. P. C. (2018). A Review of Literature on Hybrid Costing Systems. Corporate accounting & Finance, 40(4), 11-31

Langfield-Smith, K., Smith, D., Andon, P., Hilton, R., & Thorne, H. (2017). Management accounting: Information for creating and managing value. McGraw-Hill Education Australia.

Miller-Nobles, T. L., Mattison, B., & Matsumura, E. M. (2016). Horngren’s Financial & Managerial Accounting: The Managerial Chapters. Pearson.

Monroy, C. R., Nasiri, A., & Peláez, M. Á. (2014). Activity Based Costing, Time-Driven Activity Based Costing and Lean Accounting: Differences among three accounting systems’ approach to manufacturing. In Annals of Industrial Engineering 2012 (pp. 11-17). Springer, London.

Noreen, E. W., Brewer, P. C., & Garrison, R. H. (2014). Managerial accounting for managers. New York: McGraw-Hill/Irwin.

Pental Company, (2017) annual report, retrieved from https://www.pental.com.au/

Zahller, K. A. (2017). Truffle in paradise: Job costing for a small business. Journal of Accounting Education, 40, 32-42.