Describe the differences between process costing and job-order costing.
Answer both questions and respond to two peers.
Question A
Describe the differences between process costing and job-order costing. Or provide an example of each. Cost-volume-profit (CVP) analysis estimates how changes in costs (both variable and fixed), sales volume, and price affect a company’s profit.
Question B
Suppose a firm with a contribution margin ratio of 0.3 increased its advertising expenses by $10,000 and found that sales increased by $30,000. Was it a good decision to increase advertising expenses? Suppose that the contribution margin ratio is now 0.4. Would it be a good decision to increase advertising expenses?
Peer 1: The process costing is the costing for bigger volumes as it is done for massive processes, and the costs are allocated for production rather than a single job, while job order costings is the costing for an individual job order as every work completed is directly attributed to the costs of each job. Job order costing is used for more unique products. The product can be easily customized as they are produced in small quantities, while process costing is used for costing standardized products produced in large quantities (Creel et al.,2021). An example of job order costing is a company that produces custom-made machines. On the other hand, an example of process costing costs for processed foods or manufacture of erasers and chemicals.
Cost volume profit (CVP) analysis is a technique of finding how a change in fixed and variable costs affects a company’s profit. Organizations use CVP to understand the units they need to sell to break even or obtain a certain minimum profit margin. In addition, CVP helps companies identify operating activity levels to avoid making losses and ensure the company makes profits (Lulaj & Iseni, 2018). Besides, it ensures organizations plan for their future operations and monitors the current performance to maximize profits. Therefore, CVP is essential as it helps companies figure out how changes in costs, prices, and sales volumes affect the firm’s overall profits. CVP is determined by dividing the total fixed costs of production by the contribution margin per unit produced. The break-even point is equal to fixed costs divided by contribution margin.
The CVP for the firm with a contribution margin ratio of 0.3 and an advertising expense of 10000 is (10000/0.3) = 33,333.33. With the increase in advertising expense of 10000, sales increased by $30000 and the CVP at 0.3 became 33,333. Even though the increase in advertising expense led to an increase in sales, the decision was not good at a contribution margin ratio of 0.3. At a contribution margin ratio of 0.4, CVP is 10000/0.4 = 25000. This implies that the increase in advertising expense at a contribution margin ratio of 0.4 will lead to profits as the firm benefits at $5000. Therefore, increasing advertising expenses at a contribution margin of 0.4 would be a good decision.
References
Creel, T., Paz, V., & Olear, C. (2021). Using a Plant Tour to Help Teach Job Order Costing. Journal of Accounting and Finance, 21(4), 167-173.
Lulaj, E., & Iseni, E. (2018). Role of analysis CVP (Cost-Volume-Profit) as an important indicator for planning and making decisions in the business environment. European Journal of Economics and Business Studies, 4(2), 99-114.
Peer 2: Questions A:
Process costing happens when companies determine item cost by tracking the cost of each stage in the production process, instead of tracking costs for each individual item. This is different from job-ordering costing in that the costs are accumulated by the job. An example of a company that our readings gives us this week as a process costing company is BP, “one of the largest energy companies in the world.” Cost-volume-profit is influential in businesses that uses process costing. “CVP is a powerful tool for planning and decision making. In fact, CVP is one of the most versatile and widely applicable tools used by managerial accountants to help managers make better decisions.”
Question B:
Since the advertising expenses resulted in increase in sales. It is assumed that the increase in sales revenue is due to the increase in units sold. The incremental Sales were $30,000. The incremental Contribution Margin ratio is 0.3. The Incremental Contribution is ($30,000 x 0.3) $9,000. The incremental fixed expense is $10,000. The Operating Income is $1000. Therefore, the increase in advertising expense by $10,000 was not a good decision since it decreased the operating income by $1000.
If the contribution margin ration is 0.4 that would increase the operating income by $2000 thus making it a good decision.
Answer preview describe the differences between process costing and job-order costing.
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