BUS 5110 MANAGERIAL ACCOUNTING

Written Assignment-02

Topics: Submit a paper which is 2-3 pages in length, exclusive of the reference page. The paper

should be double spaced in Times New Roman (or its equivalent) font, which is no greater than

12 points in size. The paper should cite at least three sources in APA format.

In this paper, please discuss the three costing methods of job order costing, process costing, and

activity-based costing. 

 Define each method and explain when it is best suited to be used. 

 Compare and contrast the methods and consider their benefits and shortfalls. 

 Use the information provided to propose which cost method should be used to allocate

costs.

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.

There is no one “correct” answer to the proposed cost allocation method as long as the answer is

well-supported based on the week’s learning.

Superior papers will include the following when responding to the assignment question:
  Define the three costing methods.

 Explain when each is most appropriately used.

 Compare and contrast the methods, considering both benefits and shortfalls.

 Provide a well-supported proposal for the cost method Wet Suit World should use.

Be sure to use APA formatting in your paper.  Purdue University’s Online Writing LAB (OWL)

is a free website that provides excellent information and resources for understanding and using

the APA format and style. The OWL website can be accessed

here: http://owl.english.purdue.edu/owl/resource/560/01/

Your paper will be assessed using this rubric.

 Submission

Cost is an important part of any product or service creation process, and it is always welcome as

long as it is less than the selling price, ensuring that the company makes enough money for its

shareholders. Creating a precise structure for cost assignment may ensure a clear display of

financial facts, allowing managers to make better decisions about whether a specific product is

profitable or not, as well as price considerations. Various costing methods were established to aid

organization accountants in recording various types of costs based on the business's level and

demands. Job-costing, activity-based costing, and process costing are the three basic costing

methodologies. Those costing practices are rely on both fixed and variable costs linked with the

creation of the product. This document will discuss and compare the three costing methods and

which one is most suitable for the Wet Suit World Company.

Job-Costing

“Job costing involves the accumulation of the costs of materials, labor, and overhead for a

specific job. This approach is an excellent tool for tracing specific costs to individual jobs and

examining them to see if the costs can be reduced in later jobs. An alternative use is to see if any

excess costs incurred can be billed to a customer” (Job Costing Definition, 2021). It entails

meticulous recording of material costs and labor hours, as well as a defined overhead rate. It's a

process that's commonly employed in occupations that require a lot of customization, such as

garment tailoring or construction.

Job order costing is advantageous because it allows managers to compute profit margins for

specific jobs. It's also useful for keeping track of the performance of employees and teams.
One disadvantage of this method is that all materials and labor must be meticulously recorded in

order to perform accurate cost calculations. However, the job costing method does not work well

when the production cycle involves a continuous flow of raw materials through various

processing departments, and the finished output is characterized as homogenous units, each

displaying the same basic characteristics (Walther & Skousen, 2009). A general contractor, for

example, must keep track of all materials utilized, their amounts, and the number of hours each

employee worked.

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, 2009). Process Costing is best used in mass production where

manufacturing is continuous or done in batches (Ingram, 2019). This applies to companies that

produce identical units of product in batches such as soda companies, milk companies, pencils

companies, and so on.

Process costing simplifies record keeping by relying on statistical calculations rather than actual

inputs. A best advantage to process costing is that it is artless and economical to find the process

cost, and that unit cost can be computed in a weekly or even daily fashion. Key personnel also

have more control over the performance of each process or units. On the other hand, process

costing can create cost errors in the production system.

Activity Based Costing

A simplified explanation of Activity Based Costing is that it 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,

2009).

This method divides the manufacturing overhead evenly over the total volume of all products

produced. This method has the advantage of providing realistic manufacturing costs for products

by more precisely assigning manufacturing overhead. This strategy also aids in the identification

of inefficient processes and the identification of those that may require improvement. One of the

major benefits is that it makes it easier to calculate product profit margins with more precision.

The disadvantage of this strategy is that data gathering and processing takes a long time, and the

relevant data is not always readily available. In addition, activity-based costing violates accepted

accounting standards and cannot be used for external financial reporting.

Selection of costing method for Wet Suits World

Accountants can theoretically use any costing technique that is acceptable for every business

model. Nonetheless, they, along with management, must always choose the structure that is best

for the company, its budget, and the level of analysis required. The procedure costing technique

would be the ideal to use in the Wet Suit world for a variety of reasons. The manufacturing cycle

and required materials are largely the same for all units, suits are similar despite differences in

size and thickness, and the flow of raw material is consistent. This makes linking its expenses to

end products, as required by the work costing structure, extremely difficult. It's more sensible to

allocate costs to the methods required for suit production, which is at the heart of product

costing.

Finally, if we look at the three basic costing procedures, illustrating them with examples and

pointing out their benefits and drawbacks, then we understood that appropriation of every type is
dependent on the business types. Besides, we can see that a company like Wet Suit World should

adopt the Process Costing Method since it is more convenient for costing homogeneous products

and provides for a more flexible manufacturing process.

References:

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

from https://library.ku.ac.ke/wp-content/downloads/2011/08/Bookboon/

Accounting/managerial-and-cost-accounting.pdf

2. Job Costing Definition. (2021, April 12). Accounting Tools. Retrieved from

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

3. Ingram, D. (2019, March 4). Advantages & Disadvantages of Job Order Costing &

Process Costing. Chron.com. Retrieved from

https://smallbusiness.chron.com/advantages-disadvantages-job-ordercosting-process-

costing-3082.html