Cost Management and Accounting

Cost Management and Accounting

Question 1: Activity Based Accounting (ABC)

There are different costing methods that an organization uses to allocate costs. Activity-based costing (ABC) is an example of these costing approaches. ABC allocates costs to activities that consume resources in the organization. It is these activities that drive costs in the in the company. This method of costing is best suited for companies that have a significant amount of overhead that is incurred in delivering goods or services to customers and the demand of the goods and services vary. Simply put, ABC is ideal for companies that have little overhead costs and manufactures near similar goods that follow similar processes to produce (Goektuerk 18).

ABC dictates that the administrative and manufacturing overheads are assigned to products and customers causing them. This method ensures that customers and products are not assigned costs that are not related to them. For instance, ABC ensures that overheads such as non-machining costs are not assigned to customers and products that do not require them. At the same, ABC ensures that products and customers are assigned all costs arising from activities that are related to them (Goektuerk 21).

For companies with little variations between customers and products with overheads that are tied to one similar activity, e.g. machining hours, in such a case machine hours can be used to allocate the costs between the products and customers. However, if the products manufactured and activities used to serve customers are dissimilar, then such a company need to use activity based accounting.


Question 2: Similarity and Difference between Job and Process Costing

Job costing comprises a thorough accumulation of production costs that are attributed to specific units or a collection of units (Koltai 6). For instance, the construction of a workstation comprising several computers and computer furniture can be accounted for using Job costing. Costs e.g. labour expended on the construction of the workstation is recorded on a time sheet, then this is factored into the cost sheet for that particular job. The cost sheet will also have the cost of the computers and furniture used to assemble the workstation. The information on the cost sheet will then be used to draw up the invoice for the client, and the information can be used to calculate the proportion of the company’s profit that is associated with that particular job. Firms in the medical field, retail companies and manufacturing companies can use Job costing (Koltai 8).

Process costing on the other hand entails the accumulation of costs associated with lengthy productions (Dosch and Joel 15 ). Most of these productions are indistinguishable as the output of one process is taken into the subsequent process as its input or raw material. For ensample, the production of 50,000 gallons of diesel will require that both the labour and energy used in the refinery plant be recorded in the cost sheet then the sum obtained be divided by the number of units produced to ascertain the cost per unit. Process costing can be used by firms that constitute the industrial sector and may include petroleum companies, coal mining forms, and textile manufacture firms.

Having described both the job and process costing methodologies, we can now tabulate the following distinguishing features between the two:

Feature Job Costing Process Costing
  1. Size of the Job
  • Used for small production runs
  • Used for very large production runs
  1. Uniqueness of the output/product
  • Used to cost unique or dissimilar products
  • Used to cost standardized or near similar products.
  1. Nature of records kept
  • Detailed records must be kept showing time spent and materials expended to produce a specific job
  • Minimal record keeping is required because of the aggregation of costs.



Question3: Opportunities afforded by performing a customer profitability analysis

Customer profitability analysis (CPA) refers to the process of allocating costs and revenues to individual customers or to customer segments to enable the calculation of profitability per segment or individual customers. This spread of information among customers will help the firm determine its distribution of revenues. This information will help the firm as regards revenue management, cost management, and strategic management. Additionally, the use of CPA confers several other potential benefits to the firm.

Firstly, CPA will help the firm uncover the hidden opportunities for profit improvement and cost management programs. A study by Cooper & Kaplan (1991) estimates that 20% of customers generated about 225% of profits, meaning than  about 75% of the customers were unprofitable (7). CPA being a specific application of ABC easily reveals the links and relationship between resource consumptions and activities, therefore revealing the available profit opportunities.

Secondly, CPA affords a basis for the formulation of appropriate pricing decisions, discounts to customers and bonus plans. CPA will reveal why filling some customer orders are more expensive than the others are. It will also give firm an opportunity to improve its decision making process as regards offering discounts to its customers.

Finally yet importantly CPA affords the management an opportunity for employing targeting strategies and segmentation aimed founded on profitability and cost profiles. Some firms segment their customers based on their contribution to their profits. The segments may include platinum, gold, silver, bronze, and lead. Subsequent to this, the firm can develop service concepts that are segment specific.


Work Cited

Dosch, Jennifer, and Joel Wilson. “Process Costing and Management Accounting in Todayʼs Business Environment.” Strategic Finance 92.2 (2010); 37-43.

Goektuerk, Hakan. Activity-based Costing (abc) – “Advantages and Disadvantages: How Abc Can Be Applied to Institutions of Higher Education”. München: GRIN Verlag GmbH, 2007. Internet resource.

Koltai, Tamas et al. “A flexible costing system for flexible manufacturing systems using activity based costing.” International Journal of Production Research 38.7 (2000) ;1615-1630.

Robin Cooper, R., and Robert S. Kaplan “Profit priorities from activity-based costing . Harvard Business Review. 69 (1991); 130-135

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