Accounting

Key term 1 Job-order costing system

This is a costing system where an organization is producing different components to assemble a particular product. It is also applicable where the organization produces different products each period. The system is used where the products being manufactured are big enough such that the costs of each component can be estimated. This method is mostly applicable where the customers make orders of a particular quantity of products. It is also applied where the company is producing products by incorporating different parts from different processes or suppliers. Each job is valued according to the costs involved (Lewis, 1993).

The entire system of manufacturing the product is evaluated to determine the total costs of the product. The variable costs are calculated to determine the amount used on each particular item. The fixed costs are distributed equally among the jobs to estimate the actual costs used to produce particular products. Each stage of production is evaluated to determine the costs involved. The value of the product is calculated at each level to determine the value added to the item at each stage. The costs are distributed according to the stage of production and the profits can be evaluated for each stage of production. Costs centres can be established using this method of costing and this enables the organization determine the actual costs of producing particular items. Profit centers are also determined to evaluate the departments which create profits to the organization (Lewis, 1993).

Job order costing is used in all types of businesses. The service industry uses this system to accumulate the costs to account and bill the services provided to the customers. The International Standards of Accounting gives the procedures of computing job order costs for both manufacturing as well as the service industry. The job order costing system evaluates the direct materials, direct labour and overheads used in manufacturing particular products. The disadvantage of this method is that some processes may be overvalued or undervalued when estimating the manufacturing overheads. The direct materials and labor can be easily determined since solid figures are recorded by the firm (Antos  Brimson, 1999).

Through this system, all costs are traced to the particular jobs. The costs of the job are divided by the number of units in the particular job to obtain the average cost per unit. The process of cost assignment should be carefully done to avoid assigning costs to jobs not processed by the system in a particular period of time. Record keeping is important to ensure jobs are costed accordingly. Companies producing different products have a big task to separate all the costs involved in producing each particular product. Companies producing a single product have a simpler duty since the costs can be determined more easily (Lewis, 1993).
An example of an organization using job order costing is Vilas-LaMesa Company. The web link for this information is accountingformanagement.com. Vilas-LaMesa Company has provided the General and Factory Ledger for the two products produced. The costing for each product has been given to determine the costs as well as the profits for each product. The two products require two raw materials. These costs have been computed to show the distribution of costs to all the departments (Lewis, 1993).

Key term 2 Variable costing

The variable costing system treats the costs of production that varies with the output as product costs. The fixed manufacturing costs are not considered in the computation of the product costs. The variable costs of production are direct materials, direct labour and the variable overheads. The fixed costs are considered as period costs and are not included in the computation of the total product costs. The cost of goods sold does not reflect the fixed overhead costs. Some authors call the variable costing system the marginal or direct costing system. Selling and administrative costs are not considered as product costs. The fixed costs are expensed in the period they were incurred (Hussey, 1999).

The advantage of this system is that the data for Cost Volume Profit (CVP) analysis can be obtained from the variable costing computations. Under this system, profits for particular period are not affected by change in inventory. The profits are related to the sales under the variable costing holding other factors constant. This system of cost accounting creates emphasis on the impact of fixed costs. The total fixed costs are given on the income systems but they are not absorbed in the total product costs. The costing system makes it easier to evaluate the actual profitability of each product, customer and other departments of the organization. Fixed costs do not contribute to the actual profits of the organization and to include them in the total costs will give an obscured profit. Variable costing is useful in applying cost control methods. Standard costs and flexible budgets can be computed easily using the knowledge of variable costing (Antos  Brimson, 1999).
Variable costing system is used for internal management only. Some of the uses of this system are determination of income, valuing inventory, cost analysis, Break Even analysis, Cost Volume Analysis and making short term decisions. External reports do not require the use of variable costing system (Hussey, 1999).

This system has the disadvantage that the manager assumes that variable costs are composed of the unit product costs. Unit product costs are made up of both the fixed and variable costs. The system of variable costing does not include variable costs in the computation of the total costs. Therefore, this system becomes inefficient in displacing the fixed costs from the total product costs (Antos  Brimson, 1999).

An example of a company using variable costs is Daimler AG. The website link for this information is principlesofaccounting.com. The company manufactures vehicles and uses the variable costing system to determine internal decisions. The fixed administrative and operational costs are not used to determine the variable cost. The company has used this system to determine the value of its inventories. The German company has been successful in application of this system (Hussey, 1999).