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The Chief Financial Officer in the company, which is a milk production firm, known as Milk One Limited, has to decide on whether the company will be using the process costing method or the job order costing system in our firm when accounting for costs. The following is a recommendation on the best costing accounting method for our firm.
First, we shall compare as well as contrast the process costing method with the job order costing method. The job order method of costing is a cost accounting method where the costs rely on the specific kind of work done. The costs are therefore not based on the units produced but on the cost of inputs used to make a particular product or service. The process costing method of accounting on the other hand relies on the averaged costs for a given unit of production. This is to mean that the costs are related to the units of the product produced, but not to the individual costs.
Having explored the two kinds of accounting, we shall look into where each cost accounting system is used in a manner that is beneficial and in a way that will ensure there is no under costing and over cost. The job costing system that bases its way of accounting costs on the labour used in production is suitable for firms with specific services or products that are highly differentiated and there is a need to track the particular quantity of work and the raw materials used. This kind of cost accounting is most suitable for companies with highly differentiated products. Companies such as an Airline company, tour and travel companies, and advertising agencies are examples of companies in need of job order cost accounting methods (Shaw & Wild, 2011).
The cost accounting method is suitable for companies whose output is not highly distinguishable from each other. The process costing system may be easier to manage compared to that of the job order costing method. This is because obtaining the exact data needed is easier in comparison with obtaining data in the job costing cost accounting method. Companies that produce high levels of output of identical products are the best suited to use the process cost accounting method because they do not have too many unnecessary costs to include in their accounts. Oil manufacturing companies and companies that produce products for mass consumption are some of the firms that are best suited to use this system of accounting.
Our company Milk One Limited is a milk-processing firm, which produces pasteurized milk in different flavours. The milk is then distributed to various chain stores for mass sale. Since it is a small firm, there is a need to focus on one product to minimize unnecessary costs and enable the company to buy in bulk to enjoy the resulting economies of scale. This means that our company will be producing homogeneous products that have no differentiation or a little differentiation in terms of flavours. The best cost accounting system is that of the process costing system which is easier to set up and manage.
The costs of buying raw material (milk) in this case are traceable, the cost of pasteurizing the milk is traceable, the cost of packaging the milk is visible and the cost of distributing the milk is also traceable. This makes the process costing system appropriate for Milk One Limited. There is a certainty that the Chief Financial Officer of Milk One Limited takes into consideration these arguments for the advancement of the company (Shaw & Wild, 2011).
Reference
Shaw, K. & Wild, J. (2011). Managerial accounting. New York: McGraw-Hill/Irwin.
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