Determining the right costing system (job-order, operational, process, activity-based, etc.) can be difficult for a business owner.
Determining the right costing system for your company can be difficult, if a person is not familiar with common costing systems. Some of the most popular types of costing systems are job-order costing, process costing, operational costing, and activity-based costing. These costing can be used in conjunction with other types of systems for assigning costs such as life-cycle costing and normal costing, or even in conjunction with each other in certain situations.
The type of costing system that is right for your business can be determined firstly by what you do or make. If you manufacture a homogeneous product (meaning you do not have differentiated products), then process costing would probably be most appropriate. If you manufacture products that come in differentiated batches, job-order costing would be more appropriate than process costing. Operational costing is a combination of these two types of costing that is used for products that are similar but produced in batches.
Activity based costing (ABC) is a type of costing that can be used in many different industries and focuses on identifying the activities that drive costs. ABC is usually used in conjunction with other types of costing because it generally does not conform to generally accepted accounting principles (GAAP) for reporting purposes.
