| Remember when it was just you, your garage, | | | | order costing is most common in job shops, |
| and a single fabricating job each week from that | | | | specialized production, or services industries. |
| one company who saw potential in your work? | | | | 2. Process Costing: Manufacturing cost are |
| Costing, for you then, was simply a matter of | | | | allocated to products to determine an average |
| getting the work done as quickly as possible with | | | | cost per unit. Process Costing is used by |
| the lowest investment in material and no | | | | companies that mass produce identical or similar |
| inventory at all. Talk about "just in time" | | | | products; that is, continuous production. With |
| production. Often it was more like "just in in the | | | | every unit produced pretty much being the same, |
| nick of time" when it came to getting in another | | | | each receives an equivalent amount for |
| work order to keep the electricity on or bread on | | | | manufacturing costing. The more repetitive and |
| the table. | | | | continuous the production, the better. Examples of |
| My, how things have changed as you've grown | | | | operations that use process costing include |
| into a 60,000 square foot job shop with 80 | | | | thermoform packaging producers, refineries, |
| employees, and dozens of work orders coming in | | | | paper mills, and so on. |
| each day. What used to be a simple costing | | | | 3. Activity Based Costing: Familiar to many by its |
| formula (i.e., price charged - material cost = | | | | acronym, ABC, activity based costing distributes |
| profit), involves so many variables it can make | | | | (or pools) the costs of the shared activities (cost |
| your head spin. Of course, you wouldn't have | | | | drivers) associated with disparate jobs or |
| gotten to this point without a progressive | | | | production lines under the same roof. The big |
| improvement in the way you assigned costs to | | | | advantage of ABC is that it is able to reduce the |
| jobs. You came to understand that costs include | | | | distortions in costs that result from the arbitrary |
| more than just materials; they include your | | | | assignment of indirect costs in standard job order |
| machinery, your floor space, utility needs, | | | | costing (i.e., overhead). |
| additional personnel, benefits for those personnel, | | | | Ultimately, the type of costing you employ is a |
| and myriad other notions unconsidered back in the | | | | function of the sort of manufacturing you do. |
| garage days. | | | | And, who you are responsible to in your budget |
| Depending upon the type of operation you have | | | | reporting-many governmental and financial |
| as a job shop, make-to-order, or make-to-stock | | | | institutions insist on ABC for their vendors. If you |
| manufacturer, cost assignment methods can be | | | | produce thousands upon thousands of the same |
| broken down into three different approaches: Job | | | | refrigerator magnets batch after large batch, then |
| Order Costing, Process Costing, and Activity | | | | process costing is probably best for you. If your |
| Based Costing. In the most basic of terms, these | | | | orders are usually of differing engineering and |
| methods are defined as: | | | | set-ups, then job order costing is the method of |
| | | | choice. On the other hand, when you have a |
| 1. Job Order Costing: Here, costs are assigned to | | | | single plant making a variety of products over |
| specific jobs or orders. This method keeps track | | | | time but with the same production lines, greater |
| of costs by, 1) tracing material and direct labor to | | | | precision is needed to determine what drives the |
| a particular job; and, 2) applying a predetermined | | | | cost through the sharing of labor and other |
| overhead rate to each job to include costs not | | | | operational aspects for these products-you need |
| directly traceable to the production of the job. Job | | | | to go ABC. |