Written Assignment Unit 2

Costing of Wet Suits by Wet Suit World

Abstract

The types of costs are categorized as direct, indirect, and overhead costs. The way these costs

behave determines if they are fixed, variable, or a combination of both, as mixed. Once the

type and behavior are identified, the costs can be analyzed on a per-unit basis. The cost

methods are job-costing, process costing, and activity-based costing. Once managers

understand the costs of production, they can use that information for various analyses, which

will be the subject of the next unit.

In this paper, the three costing methods are reviewed with advantages and disadvantages.

While the traditional two methods are simple and conform to GAAP, ABC methods can

allocate manufacturing overhead more accurately to products and processes that use the

activity. The ABC analysis for Wet Suit World shows that ABC provides deeper understanding

of costs even for a simple product lineup.

1. Definition of three costing methods and suited cases

(1) Job costing: Job costing system records revenues and costs for each job (Heisinger &

Hoyle). Job costing is best suited to those situations where goods and services are

produced upon receipt of a customer order, according to customer specifications, or in

separate batches (Walther & Skousen, 2018).

Advantages:

- Calculate the profit earned on individual jobs

- Ascertains whether specific jobs are desirable to pursue in the future
- Keeps track of individuals' and teams' performance in terms of cost-control,
efficiency and productivity

Disadvantages:

- Required to track all materials and labor used during the job
- Large number of small jobs is executed at a time in job costing
- Not provide an effective way of controlling overhead costs

(2) Process costing: Process costing is methodology used to allocate the total costs of

production to homogenous units produced via a continuous process that usually involves

multiple steps or departments (Walther & Skousen). A process costing system is used by

companies that produce similar or identical units of product in batches employing a

consistent process (Heisinger & Hoyle).

Advantages:

- Simplifies record keeping by relying on statistical calculations rather than actual

inputs
- Provides detailed information on the production statistics of individual departments
or work groups
- Less clerical efforts and costs are enough to calculate cost

Disadvantages:

- Required to track all materials and labor used during the job
- Not disclose the weaknesses and inefficiencies of any process
- Not consider the efforts of individual workers or supervisors
(3) Activity-based costing: Activity-based costing attempts to divide production into its core

activities, define the costs for those activities, and then allocate those costs to products

based on how much of a particular activity is needed to produce a product (Walther &

Skousen). Companies that produce several different products may believe that the benefits

of implementing ABC will outweigh the costs (Heisinger & Hoyle).

Advantages

- Provides realistic costs of manufacturing for specific products

- Allocates manufacturing overhead more accurately to products and processes that use the
activity
- Identifies inefficient processes and target for improvements
- Determines product profit margins more precisely

Disadvantages

- Collection and preparation of data is time-consuming

- Costs more to accumulate and analyze information
- Source data isn't always readily available from normal accounting reports
- Reports from ABC don't always conform to GAAP and can't be used for external reporting

2. Proposal for the cost method Wet Suit World should use

According to Heisinger & Hoyle, the companies with one or two products that require very

little variation in production may not benefit from an ABC system. However, that

management would benefit from understanding the activities involved in the process and the

costs associated with each activity.

Wet Suit World seems to have just one product line with one design and one production

process even though it has variety of size and thickness. However, we can get lot of insights

on the costs by allocating different conditions and by costing with ABC method.

(1) Assumptions

Indirect costs and SG&A costs are allocated as same percentage as the case study on the
textbook (Walther & Skousen, p.127). Each size and thickness has different activities as
follows.
[Prices] 2mm: $350, 5mm: $450, 5mm: $500
[Batch] 2mm: 50 units, 5mm & 7mm: 25 units
[Size adjustment service frequency] 2mm: 1/50 units, 5mm: 1/25 units, 7mm: 1/20 units
[Size for Markets] Asia: S/M/L/LL, Europe: M/L/2L/3L, North America: M/L/2L/3L
[Material cost] 7mm 3L costs 2.4 times higher than 2mm S
[Labor cost] 7mm 3L costs 1.3 times higher than 2mm S

(2) ABC Analysis result

Table 1. Product profitability analysis

Thickn es s 2m m 5mm 7m m TOTAL
Size S M L LL LLL S M L LL LLL S M L LL LLL
P ER ACTIVITY COST
Dire ct mate rials Trace ab le 75,000 330,000 540,000 390,000 105,000 225,000 720,000 1,020,000 810,000 285,000 150,000 472,500 660,000 345,000 180,000 # ## # # #
Dire ct la bor Trace ab le 15,000 60,000 90,000 60,000 15,000 36,000 108,000 144,000 108,000 36,000 19,500 58,500 78,000 39,000 19,500 886,500
Rob otic s $ 89 44,324 177,294 265,941 177,294 44,324 88,647 265,941 354,588 265,941 88,647 44,324 132,971 177,294 88,647 44,324 # ## # # #
P rod u ction Set Up $ 237 2,366 9,465 14,198 9,465 2,366 9,465 28,395 37,860 28,395 9,465 4,733 14,198 18,930 9,465 4,733 203,500
Tech Sup p ort $ 112 1,123 4,490 6,736 4,490 1,123 4,490 13,471 17,961 13,471 4,490 2,806 8,419 11,226 5,613 2,806 102,717
P rod u ction De s ign
$ 165,500 11,033 11,033 11,033 11,033 11,033 11,033 11,033 11,033 11,033 11,033 11,033 11,033 11,033 11,033 11,033 165,500
(s ha red )
Ad vertis in g Cam p ain (As ia) $ 123,667 10,306 10,306 10,306 10,306 10,306 10,306 10,306 10,306 10,306 10,306 10,306 10,306 123,667
Ad vertis in g Cam p ain (NA) $ 123,667 8,244 8,244 8,244 8,244 8,244 8,244 8,244 8,244 8,244 8,244 8,244 8,244 8,244 8,244 8,244 123,667
Ad vertis in g Cam p ain (EU) $ 123,667 10,306 10,306 10,306 10,306 10,306 10,306 10,306 10,306 10,306 10,306 10,306 10,306 123,667
Total Trace ab le a n d
167,396 621,138 956,763 681,138 197,396 393,186 1,175,696 1,614,299 1,265,696 453,186 250,946 726,477 985,339 527,614 280,946 # ## # # #
Allocated Cos ts
Un a lloc ated Cos ts 199,500
Total Cos t # ## # # #

P rod u ct Re ven ue s 175,000 700,000 # # ## # # 700,000 175,000 450,000 1,350,000 1,800,000 1,350,000 450,000 250,000 750,000 # ## # # # 500,000 250,000 # ## # # #
P rod u ct Margin 7,604 78,862 93,237 18,862 - 22,396 56,814 174,304 185,701 84,304 - 3,186 - 946 23,523 14,661 - 27,614 - 30,946 652,783
Entity P rofit 453,283
6%

Table 2. Cost Ration for each size and thickness

Cos t Ratio S M L LL LLL Overall
2mm 5% 13% 10% 3% - 11%
5mm 14% 15% 12% 7% - 1% 6%
7mm 0% 3% 1% - 5% - 11%

ABC Analysis shows that the middle-size and middle-thickness models are the more

profitable than the corner models. The most profitable model is 5mm - M with 15% cost ratio

while the least ones are 2mm & 7mm - 3L with -11% cost ratio. Although the company cannot

easily cut down the number of sizes and thicknesses, it can utilize the analysis to derive the

distinctive measures to optimize their costs.

3. Conclusion

The three costing methods were reviewed with advantages and disadvantages. While the

traditional two methods are simple and conform to GAAP, the ABC methods can allocate

manufacturing overhead more accurately to products and processes that use the activity. The

ABC analysis for Wet Suit World showed that ABC provides deeper understanding of costs

even for simple product lineups.

Appendix

Activity Cost Pools

ACTIVITY Rob otics P rod u ction Tech P rod u ction Ad vertis in g Un allocated
LEVEL Unit Level Batch Level Cu s tomer Level P rod u ct Level Market Level
Nu mb er of
Number of Nu mb er of Mu n b er of Nu mb er of
METRIC s ize ad ju s tmen t
units produced s et u p s p rod u cts d es ign ed Market
s up p ort
Direct materials $ 7,400,000 0% - 0% - 0% - 0% - 0% - 0% -
Direct lab or $ 900,000 0% - 0% - 0% - 0% - 0% - 0% -
In d irect lab or $ 200,000 40% 80,000 20% 40,000 10% 20,000 15% 30,000 0% - 15% 30,000
In d irect material $ 100,000 20% 20,000 35% 35,000 5% 5,000 20% 20,000 5% 5,000 15% 15,000
Factory main tenan ce $ 150,000 25% 37,500 30% 45,000 0% - 5% 7,500 0% - 40% 60,000

Robotices leas e $ 2,000,000 100% 2,000,000 0% - 0% - 0% - 0% - 0% -

In s u ran ce $ 70,000 25% 17,500 20% 14,000 10% 7,000 0% - 0% - 45% 31,500

Oth er $ 180,000 50% 90,000 30% 54,000 10% 18,000 5% 9,000 5% 9,000 0% -

Total P rodu ct Cos t $ 11,000,000

SG&A
Managemet s alaries $ 80,000 10% 8,000 10% 8,000 20% 16,000 20% 16,000 25% 20,000 15% 12,000
Sellin g exp en s es $ 50,000 0% - 0% - 15% 7,500 15% 7,500 60% 30,000 10% 5,000
Des ign an d en gin eerin g $ 90,000 5% 4,500 5% 4,500 15% 13,500 75% 67,500 0% - 0% -
GAME on camp aign $ 300,000 0% - 0% - 0% - 0% - 100% 300,000 0% -
Bu s in es s office ren t $ 20,000 0% - 0% - 35% 7,000 25% 5,000 5% 1,000 35% 7,000

Accou n tin g $ 60,000 5% 3,000 5% 3,000 10% 6,000 5% 3,000 10% 6,000 65% 39,000
TOTOAL COST $ 11,600,000 $ 2,260,500 $ 203,500 $ 100,000 $ 165,500 $ 371,000 $ 199,500

Un its Set u p s Ord er Ds ign s Markets

2mm, S 500 10 10
2mm, M 2,000 40 40

2mm, L 3,000 60 60

2mm, LL 2,000 40 40
2mm, LLL 500 10 10
5mm, S 1,000 40 40

5mm, M 3,000 120 120

5mm, L 4,000 160 160

5mm, LL 3,000 120 120
5mm, LLL 1,000 40 40
7mm, S 500 20 25
7mm, M 1,500 60 75
7mm, L 2,000 80 100
7mm, LL 1,000 40 50
7mm, LLL 500 20 1
Des ign 1
Markets 3
TOTAL ACTIVITY QUANTITY 25,500 860 891 1 3
P ER ACTIVITY COST $ 89 $ 237 $ 112 $ 165,500 $ 123,667
 Unit, Batch, Size adjustment service, Ads

UNIT S M L LL LLL
2mm 500 2000 3000 2000 500

5mm 1000 3000 4000 3000 1000

7mm 500 1500 2000 1000 500

BATCH S M L LL LLL
2mm 10 40 60 40 10
5mm 40 120 160 120 40
7mm 20 60 80 40 20

SIZE ADJUST S M L LL LLL

2mm 10 40 60 40 10

5mm 40 120 160 120 40

7mm 25 75 100 50 25
ADS S M L LL LLL
2mm 2 3 3 3 2
5mm 2 3 3 3 2
7mm 2 3 3 3 2

Material cost and Labor cost per unit

Material Cos t x (2mm S) S M L LL LLL

2mm S ¥ 150 2mm 1 1.1 1.2 1.3 1.4

5mm 1.5 1.6 1.7 1.8 1.9
7mm 2 2.1 2.2 2.3 2.4
Lab or Cos t x (2mm S) S M L LL LLL
2mms ¥ 30 2mm 1 1 1 1 1
5mm 1.2 1.2 1.2 1.2 1.2
7mm 1.3 1.3 1.3 1.3 1.3
References

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https://2012books.lardbucket.org/books/accounting-for-managers/index.html

Walther L. M. & Skousen, C.J. (2018). Managerial and Cost Accounting. Bookboon.com

Ingram, D. (n.d.). Advantages & Disadvantages of Job Order Costing & Process Costing.

Chron. Retrieved from https://smallbusiness.chron.com/advantages-disadvantages-job-order-

costing-process-costing-3082.html

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