BUS 5110 Written Assignment Unit 2 1

Account Costing

Written Assignment Unit 2

Wonnetta Nicholson

University of the People

BUS 5110 Written Assignment Unit 2 2

Cost Accounting

This paper will discuss the definition, application, and benefits of job order costing,

process costing, and activity base costing. It will also compare as well as contrast the three

methods. Methods such as these are used to not only define the costs of a product but more

importantly, for managers to use in their decision-making process.

Job order costing is a system for assigning manufacturing costs to an individual product

or batches of products. Walther and Skousen (2009) defined job order costing best suited for

applications were a product or service is produced to a customer specification. Service firms,

like tax preparers, assign costs that include materials and labor to each client, whereas product

firms, such as contract manufacturer, can assign material and labor costs to the final product. For

each, direct costs (material and labor) are attached to the product or service that is being used

while indirect costs (overhead) is spread across all produced or serviced items. Indirect costs

include buildings, equipment, and salaried administrative personal. (Indirect costs. n.d.).

Process costing is used where similar products are mass-produced through various steps

or departments, and where the costs associated with individual units of output cannot be

differentiated from each other. Businesses that use a consistent process, like a car-washing shop,

use the same method to deliver or produce the same product or service would use the process

costing system. The costs derived by assigning material, labor and overhead directly to the

various methods or departments. Once this is known, all the departmental or process expenses

added to determine the costing of the final product or service.

Activity-based costing (ABC) Kenton and Johnson defined activity-based costing as

costing method that assigns overhead and indirect costs to related products and services.
BUS 5110 Written Assignment Unit 2 3

This accounting method of costing recognises the relationship between costs, overhead activities,

and manufactured products, assigning indirect costs to products with smaller arbitrarily than

traditional costing methods. However, indirect costs, e.g. management and office staff salaries,

are difficult to attach to a product.

The benefit of using ABC costing is that it directly assigns a cost for each activity at a product

level.

Compare and contrast Job coasting, Process coasting and Activity-based coasting their benefits
and shortfalls

Differences Job costing Process Costing Activity Based Costing

Based on the activities

Based on Customer Order Based on the Continuity of process involved
Low production volume High production volume High or low production
Job cost sheet is used Production cost report is used
Unit cost computed by
Unit cost computed by job Unite cost computed by department activity
Cost transferred when each accounting
cost transferred when each job is completed period is ended
Heterogeneous products Homogeneous products Both type of products

Benefits
Suitable for cost plus contracts Average cost can be easily determined Accurate cost caculation
Actual Cost and Budgeted Cpst are Compared Allocation of expenses is easily made Correct decision making
Budgetary Control System is followed Standard costing is followed Exect profit can be known

Shortfalls
Job Coasting is expensive
No standardization in Job Coasting
More Manual work is involved
Identification of activities is
Average cost is used to value the product more work involved
This cost may not be suitable for all purposes Very costly to implement
Cannot provide accurate estimate when More technical work is
thereis single process and many products required

Cost method Wet Suit World should use.

Following are points to be considered.

 Materials are the same for all suits

 All suits undergo the same production

BUS 5110 Written Assignment Unit 2 4

 All suits undergo the same quality inspection process

By the above observation, I conclude that Process Coasting is suitable for Wet suit world.
BUS 5110 Written Assignment Unit 2 5

References

Walther, L. M. & Skousen, C.J. (2009). Managerial and Cost Accounting. Bookboon.com

Indirect costs. (n.d.). Retrieved February 10, from

https://www.accountingtools.com/articles/what-are-indirect-costs.html

Comparison of Job Costing with Process Costing. (n.d.). Retrieved on February12 2020, from

https://saylordotorg.github.io/text_managerial-accounting/s08-01-comparison-of-job-costing-

with.html

Corporate Finance & Accounting –W. Kenton & J. Berry-Johnson Retrieved on February 10

2020, from: https://www.investopedia.com/terms/a/abc.asp