Question

1. What do you think some downsides and (if any) upsides of not knowing manufacturing costs?

2. How does knowing the cost of a company's goods help in establishing cost control measures?

3. Which do you think is more important, Job Costing or Process Costing?

4. Couldn't some food companies fall under process costing as they are making the same product in bulk?

Answer 1

1. The biggest downside of not knowing manufacturing costs is that you do not know the product cost. If you do not know the product cost, you end up over-costing or under-costing the product, thereby arriving at incorrect product prices. If your pricing is too low, your firm compromises on profitability. If your pricing is too high, you cannot compete in the market, and your firm loses out on market share.

2. Standard costs can be set against which actual costs can be compared. In case of variances, the originating causes are looked into for corrective action and cost control. Value engineering can be done to eliminate unnecessary costs and wastage. This can lead to substantial cost control. Unless you know the cost of your products, you cannot carry out these measures,

3. Both are equally important, depending on the type of industry.

Job costing is important for industries involved in making customized products, each of which has its own specifications. For example, jewellery, customized furniture, customized electronic equipment, tax consulting, management consulting etc. They are not produced en mass, and are not interchangeable. Accounting is done for each job separately.

Process costing on the other hand is applied in industries producing homogeneous products in bulk, and in industries where manufacturing processes are involved, and the output of each subsequent process is distinguishable from the output of each prior process. Examples: Bakery, Pharmaceuticals, Candy, Cement, Refining Crude Oil etc.Accounts are maintained for each process.

4. Yes. Companies manufacturing fruit juice, carbonated beverages, candy, bread, cookies, ice cream etc just to name a few fall under process costing, as the products are manufactured in bulk with common specifications, involving multiple processes to convert the raw materials into finished products.