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Managerial Accounting - Job Costing PDF Print E-mail
Thursday, 21 June 2012 11:55


Managerial Accounting - Job Costing


          Every company is duty bound to keep accounting records to prepare annual accounts.  Besides, a company has to watch its performance and to take corrective action to keep itself on the right path. For this purpose, it needs both operational and financial information.  The latter is provided by a sound accounting system which is nothing but a formal arrangement by which a company develops its financial database eventually turning into financial statements.


What is a costing system?




          Cost accounting system is part of the main accounting system to provide useful information for planning and control. It collects raw information from accounting records, process them and segregates them into various cost components.  An ideal costing system can easily provide any cost information about a process, product, project, or technique. It can generate and compare financial performance across product lines and different processes for producing the same products. It helps minimize waste, use resources in a productive way and weed out money losing products or services.



How to choose a suitable system?


          Basically, there are two costing systems: (i) Job-order costing and (ii) Process costing. Another is called hybrid which is blend of the two. Still there is one more system called Backflush.

Some words about Backflush

          Traditional costing system are sequential in nature as they track costs when raw materials move to working in process to finished goods and finally to sales. Backflush works backwards. No costing is done until goods are finished. Standards costs are then flushed backward through the system to assign costs to products. But this system is used where operating cycle is short and inventory levels are low or negligible.

          The type of costing system that is right for your business can be determined firstly by what you do or make. If you manufacture a homogeneous product (meaning you do not have differentiated products), then process costing would probably be most appropriate. If you manufacture products that come in differentiated batches, job-order costing would be more appropriate than process costing. Hybrid costing (also called operational costing) is a combination of these two types of costing that is used for products that are similar but produced in batches. For example, a printing press is publishing 10,000 diaries which are similar in nature. It must start from process costing where the work would be departmentalized into to paper cutting, printing and gluing. The final product may be in different bindings such as paper, plastic, hardboard, leather and cloth. Here the printing press would be dealing in batches and job order costing would be most suitable


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