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Written Assignment Unit 2 - Cost

Masters of Business Administration, University of the People

BUS 5110, Managerial Accounting

Dr. Jamal Boubetana

15 Sep, 2021
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In this paper, please discuss the three costing methods of job order costing, process costing,

and activity-based costing. 

Job Order Costing:

Job order costing is a costing method that is used to determine the cost of manufacturing each

product. This costing method is usually adopted when the manufacturer produces a variety of

products, which are different from one another, and needs to calculate the cost for doing an

individual job. Job costing includes the direct labor, direct materials, and manufacturing

overhead for that particular job. (Kesavan, 2020)

Shortfalls of Job Order Costing:

- Paperwork Intensive: Job order costing systems have a massive paper trail. ...

- Measurement Difficulties

- Conflict within the Organization

- Overheads Based On Estimates

- Overheads Cannot Be Controlled (Juneja, n.d.)

Process Costing:

Process costing is used when there is mass production of similar products, where the costs

associated with individual units of output cannot be differentiated from each other. (Process

costing | Process cost accounting, 2021)

Shortfalls of Process Costing:

- Costs obtained at the end of the accounting period are only of historical value and are

not very useful for effective control.

- Work in progress is required for ascertaining at the end of an accounting period for

calculating the cost of continuous process.

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- There is a wide scope of errors while calculating average costs. (Ojha, 2019)

Activity-based costing (ABC)

Activity-based costing (ABC) is a costing method that assigns overhead and indirect costs to

related products and services. This accounting method of costing recognizes the relationship

between costs, overhead activities, and manufactured products, assigning indirect costs to

products less arbitrarily than traditional costing methods. (KENTON, 2020)

Shortfalls of ABC:

- Some indirect costs, such as management and office staff salaries, are difficult to

assign to a product

- The system could be very complicated and unmanageable as the number of activities

increase, and not worthy where the number of activity is a little.

- 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. (Woodruff,

2019)

- Compare and contrast the

methods (Consider the
Advantages and
Disadvantages)
- Compare and contrast the
methods (Consider the
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Advantages and
Disadvantages)
Wet Suit World is a company that manufactures wet suits for use with water sports such as

snorkeling and scuba diving. The suits are made in sizes small through 3x extra large with

levels of insulation layers of 2 millimeters, 5 millimeters, and 7 millimeters. They come in

black with the Wet Suit World logo imprinted across the chest. The materials are the same

for all of the suits, though they vary in thickness. All suits undergo the same production and

quality inspection processes.

As the number of options are wide, numerous sizes and thicknesses, so job order costing shall

be eliminated, where Activity based costing or and process costing are more suitable in this

case.

Why ABC?

Activities like purchasing of raw materials, cost of dyeing, knitting, printing, transport cost,

packaging, banking charges, overheads and cost of trims and accessories used all are included

in it. The merchandiser and the top management of a company are all activities needs to be

addressed in costing of the Wet Suit.

Why Process Costing?

- Process costing is most applicable to companies that produce identical units in large

consignments. This is quite apparent in this example.

- Process costing is usually associated with producers of identical products such as

bottled drinks in large batches. In this particular instance, the materials are the same

for all suits.

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- Process costing is commonly used in the manufacturing industry, where units are

continually produced in mass using one or more processes. This is what is happening

in this example, and the suits a produced in different sizes and shapes
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References

Juneja, P. (n.d.). Disadvantages of Job Order Costing System. Retrieved from

managementstudyguide: https://www.managementstudyguide.com/disadvantages-of-

job-order-costing-system.htm

KENTON, W. (2020, 2 10). Activity-Based Costing (ABC). Retrieved from investopedia:

https://www.investopedia.com/terms/a/abc.asp

Kesavan, S. (2020). What is job order costing? Retrieved from Zoho:

https://www.zoho.com/inventory/guides/what-is-job-order-costing.html

Ojha, C. D. (2019, 9 27). Advantages & Disadvantages of Process Costing. Retrieved from

civilservicegurukul: https://www.civilservicegurukul.com/advantages-disadvantages-

of-process-costing/

Process costing | Process cost accounting. (2021, 8 10). Retrieved from accounting tools:

https://www.accountingtools.com/articles/2017/5/14/process-costing-process-cost-

accounting

Woodruff, J. (2019, 1 25). The Disadvantages & Advantages of Activity-Based Costing.

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

activitybased-costing-45096.html