Costs accounting is a managerial accounting approach that is intended to measure the

overall cost of production of a company by measuring the variable cost of each production

process as well as fixed costs including expenses. The costing is applied to both variable and

fixed cost related to the production process by an internal management team of the company. It

calculates and tracks these costs individually first and then compares input costs with production

results to help financial performance analysis and future business decisions. [ CITATION ALI14 \l

1033 ]

Hypothetical example

XYZ. Venture received a personalized order of leather jacket as two products

manufactured by Reiss and Saint Laurent which was manufactured by processing through two

jobs job I and job II. The inventory balances for the production of Reiss and Saint Laurent using

two jobs are given as:

Now, fixed factory overhead rate = Fixed factory overhead/ Total direct labor hours
= 175,000/3500
= $50 per unit.
Explanation: The income statement is developed in accordance with the COGS methodology.

Total $620,000 sales are made. Saint Laurent costs $215,000 more to manufacture than

$153,000 for Reiss. The gross margin is determined by removing COGS from $252,000 in sales

revenues. However, the cost of non-manufacture for Reiss is $115,000 higher than for Saint

Laurent which is $90,000. A 5% tax on income with the net profit of $44,650 has been deducted.
Activity-based costing (ABC) is an aggregate and indirect costing approach for the goods and

services involved. This costing accounting method recognizes the links between costs, overhead

activities and products manufactured, which less selectively allows indirect costs for products

than traditional costing methods. However, it is difficult to assign some indirect costs to a

product, such as management costs and office salaries.[ CITATION WIL15 \l 1033 ]

Hypothetical Example

We

assume fixed

overhead is

classified into

below cost pool

drivers:

Now using formula,

Cost driver rate= Budgeted overhead/ Total budgeted volume
We get,
Explanation: The income statement is presented in accordance with the COGS methodology.

Total of $620,000 sales are made. The cost of production for Saint Laurent are shown to be

higher than Reiss $146,750. The gross margin is determined by removing COGS from $252,000
in sales revenues. Yet for Reiss $115,000, the cost of non-manufacturing was greater than

$90,000 for Saint Laurent. A 5% tax on wages with the net profit of $44,650 has been deducted.

Conclusion

Comparing both the system, the net profit or profits are identical. The COGS across Reiss

are higher in the costing of work orders and lower in ABC systems, the COGS in Saint Laurent

are lower in the cost of employment and lower in ABC. This increase in COGS result is due to

the change in the perception of fixed overhead factories. The overhead costs are best calculated

for the ABC system operation and provide a clear idea of the overheads, while overhead costs

information is not specified in the work order costs system, which ensures that the ABC system

measures net profits in an organization more accurately and systematically.

References

KENTON, W. (2015). investopedia. Retrieved from Activity-Based Costing

(ABC): https://www.investopedia.com/terms/a/abc.asp

TUOVILA, A. (2014). investopedia. Retrieved from Cost Accounting:

https://www.investopedia.com/terms/c/cost-accounting.asp