SLC | S21W3 | Costing for Entrepreneurs - Costing Methods
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In my opinion, costing methods are detailed frameworks that businesses use to determine their production or service delivery costs.
These methods plays a vital role for a businesses operations(Daily business activities) because it gives detailed analysis and clarity on production costs, which helps you to make rational decisions based on the assessed data, by choosing the right costing methods businesses can avoid underpricing (Which could lead to losses) or over pricing (Which could reduce customers), in simple terms effective costing methods help the businesses to identify their inefficiencies and the areas where costs can be minimized, which can improve the overall financial performance of a business.
Importance of Costing Methods :-
Set up Competitive prices - By calculating detailed cost analysis, businesses can set up appropriate pricing neither overpriced nor underpaid pricing.
Optimize Resources - By analysing the costs, businesses can find out the inefficiencies in the business operations and reduce the waste.
Boost Profit - Getting an understanding of your overall cost structure allows you to make strategic adjustments such as reducing the unnecessary expenses or finding more cost effective raw materials which helps you gain more margins.
Difference between job order costing and process costing
Job Order Costing -
From what i understand, This method is suitable for businesses that produce customized products services as per their individual customer requirements. In this method costs are tracked by the individual jobs or work orders, which makes it highly suitable for businesses with a wide variety of outputs such as a business of consulting or cake baking.
Each job order has a unique cost and direct materials, labor and overhead expenses for each individual order, this method makes sure that businesses can find out precise calculated costs for each unique order that they receive, making it easier for businesses to set up appropriate pricing for their customized products.
Process Costing
This method is used for businesses which deals in mass production environments, in simple terms we can say that it's used where homogeneous products are being manufactured that too on a large scale such as beverage manufacturing or chemical manufacturing. In this we track the overall units production cost rather than by individual orders like job order costing, this helps you get a standardised per unit cost.
So the major difference between both of these costing methods is that Job order costing focuses on individuality while process costing focus on uniformity or homogeneous products.
Two additional costing methods
Lean costing method-
This is my personal favourite as i have studied it my whole MBA since I was into Operations and marketing.
This method is inspired by the principles of lean manufacturing, which focuses on elimination of wastage and increasing the overall efficiency. The major focus of the method is sustainability goals by prioritising efficiency in energy usage, material and various processes. As for the example of cake baking - They can adopt lean manufacturing by minimising their ingredients wastage during production and re using the remaining raw materials for another related product such as making cup cakes with leftovers since cake baking can sell both of the items.
Standard Costing-
It's just like it's name, standard means in this method we set a predetermined rates for the raw materials, labor and overhead expenses. These standard costs works like a benchmark to compare the actual costs with the standard costs to determine the variance between them.
This method is effective for budget control, as it helps the businesses to find out where the actual expense is getting deviate from the standard expectations, which allow you to take corrective measures.
Job order costing for a cake business
Let's assume our cake business received a wedding cake order and the expenses and process is as given below.
Labor Costs
Baker’s time: 8 hours @ $20/hour = $160.00
Designer’s time 3 hours @ $25/hour = $75.00
Total Labor Cost = $235.00
Total Cost
Total Cost = Direct Material Cost + Labor Cost + Indirect Cost
= $108 + $235.00 + $46.00 = $389
it can be sold for above 450$ to get a good amount of profit for the order.
I hope i was able to mention all the required task details, it was great experience.. I also invite my friends @ahlawat @senehasa @awesononso
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Greetings @rishabh99946
1.- You have presented the concept and importance of cost calculation methods, making it clear that these allow timely decision-making in a company.
2.- You have presented the differences between work order and process order, basically implying that it differs according to the dimension of production.
3.- You have shared 2 very interesting calculation methods, revealing that they optimize resources in a production process.
4.- You have developed a proposed exercise, adequately determining costs through work order calculation methods.
Thanks for joining the contest
Thank you.