The cost implications of using one method over another

The cost of a particular method may vary depending on the product in question. Customized orders entail higher expenses in raw materials, workforce, and indirect costs than those produced in large quantities. The group’s manufacturing practices can impact expenses, adding complexity to the situation. Employing a more streamlined production methodology can result in cost savings for a collective.

An illustration of Job Order Costing. A consumer places a customized order for a Lego construction kit with the Lego Group. The consumer selects multiple personalization alternatives. A personalized set will undoubtedly entail a higher cost than a standard set belonging to the same category. Customized configurations require supplementary resources, workforce, and indirect expenses. The team will meticulously monitor all expenditures associated with customized furniture. Subsequently, the corporation would aggregate all expenses and allocate them to the customer’s order to accurately monitor the transaction’s profitability.

Process costing illustration, Lego group is finalizing a conventional Lego set for the summer period. The group would produce the set of toys in batches, implementing a more streamlined production process for the corporation regarding set development. Implementing this strategy could decrease expenses related to resources, labor, and overhead since the products would be costed in batches, and the costs would be summed up after the production process. Upon aggregating and allocating these expenses to the manufacturing procedure, a corporation can enhance its ability to monitor its financial gains. Additionally, process costing enables the organization to identify and rectify inefficient production processes.

Factory overhead costs

Factory overhead encompasses all of the indirect expenses that arise during the production process. Typical manufacturing overhead expenses include the depreciation of factory equipment, wages and salaries for factory employees, and the cost of electricity to power factory machinery. The phrase “overhead costs” is utilized in the manufacturing industry to refer to indirect expenses that cannot be directly attributed to a specific item (Indeed, 2023). The product’s final cost encompasses these expenditures using a pre-established overhead absorption rate. A company’s “overhead absorption rate” refers to the proportion of non-production expenses allocated towards financing production costs, including rent, utilities, and rent escrow. Cost drivers include indirect materials, indirect labor, utilities, financial, and material costs.

Recommendations

According to my research findings, it is recommended that the group adopt a hybrid accounting system that integrates both Process Costing and Job Order Costing methodologies. Using Job Order Costing is advantageous for enterprises that offer personalized products or services as it enables them to monitor the expenses associated with customer orders. Process Costing should be employed by businesses that make or sell similar items or services. Process Costing lets the organization track manufacturing process costs. The corporation can enhance its earnings by comprehending its operational expenses more effectively and enhancing its production procedures.

References

Fagerstrøm, A., Bendheim, L. M., Sigurdsson, V., Foxall, G. R., & Pawar, S. (2020). The marketing firm and co‐creation: The case of co‐creation by LEGO. Managerial and Decision Economics, 41(2), 226-233.