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Unit 2 – Written Assignment

Case Study: Wet Suit World

Department of Business Administration, University of the People

BUS 5110 – Managerial Accounting

Dr. Bhavesh Kumar Rathod

June 28, 2023

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Case Study: Wet Suit World

The following is a case study analysis of the manufacturing company Wet Suit World and

the consideration of applicable managerial accounting costing methods as they may pertain to the

company’s manufacturing business model. Wet Suit World manufactures water sports wet suits

for activities such as snorkeling and scuba diving. The suits are made in sizes small to 3XL,

coming in three different thicknesses of insulation layers, from 2 millimeters, 5 millimeters, to 7

millimeters. The suits come in the same black color and with the same Wet Suit World logo

imprinted across the chest. Wet Suit World uses the same material for all of the suits, regardless

of thickness, and all the suits go through the same production and quality inspection processes.

Given these details, we will explore the three managerial accounting costing methods that Wet

Suit World may wish to implement to best suit their specific manufacturing operations.

Job Order Costing

Job order costing is an accounting costing method that records revenues and costs for

each job (Heisinger & Hoyle, n.d.). A job is defined as an activity that produces a unique

product, one that can be easily distinguished from other products, such as custom-made furniture,

or building a custom home (Heisinger & Hoyle, n.d.). For such businesses that primarily perform

custom work, choosing job order costing for tracking revenues and costs benefits the company in

the following ways (Heisinger & Hoyle, n.d.):

• As estimates are key to proper custom pricing in the world of unique pieces of work, it is

important that costs are measured accurately.

• It is vital that each individual job be tracked for profitability based on its actual revenues

and actual costs.

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• Comparing and reconciling actual costs with estimated costs is critical when there are

potential fluctuations, such as a drastic increase in a raw material after an estimate was

given. This may necessitate renegotiating quoted pricing on those affected jobs or

adjusting the pricing of future jobs to absorb this increase.

Job order costing is typically best suited to business models where goods are produced

and services are provided upon receipt of a customer order, to be fulfilled to custom

specifications (Walther & Skousen, 2009). Given that Wet Suit World’s products are

generally uniform in the same black material, same chest logo, and go through the same

production and quality control processes, it is not apparent that Wet Suit World performs

individual custom piecework to individual customer specifications (Indeed Editorial Team,

2022). That said, job order costing will likely create unnecessary steps in the accounting

process.

Process Costing

Rather than tracking unique products, the accounting system of process costing focuses

on mass-produced products and total production costs (Indeed Editorial Team, 2022). Process

costing is most useful in the manufacturing of large volumes of single or similar products

(Indeed Editorial Team, 2022). Process costing simplifies accounting for businesses producing

uniform products, without having to allocate time and resources to tracking the revenue and costs

for each individual product (Heisinger & Hoyle, n.d.). Instead, process costing assigns product

costs (direct materials, direct labor, and manufacturing overhead) to each production department

or production process, versus each individual job (Heisinger & Hoyle, n.d.). Given the

uniformity of Wet Suit World’s wet suits in terms of production process, material, color, and
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inspection, it is clear that these wet suits are mass-produced. As such, a process costing

accounting method would be better suited to Wet Suit World’s manufacturing operations.

Activity-Based Costing

The final method of costing to be discussed is activity-based costing. Giving businesses

more accurate production costs, activity-based costing is beneficial to manufacturers in

allocating specific overhead costs to more expensive products (Indeed Editorial Team, 2023).

Given that some products may be costlier to produce, depending on their indirect costs, activity-

based costing allows these additional costs to be calculated and assigned to those more expensive

products, and provides a more accurate picture of their true revenue, costs to produce, and

profitability (Indeed Editorial Team, 2023). Having this insight will help ensure pricing

strategies are accurate, and that certain products are not priced too high or too low. There are

disadvantages to activity-based costing, such as being a time-consuming and resource-heavy

process. Products have to be identified and divided into different pools, and costs have to be

evaluated for each product manually, and this process typically requires assigning a dedicated

team of management-level staff to this task, and may even require the purchase of dedicated,

specialized software for this purpose (Indeed Editorial Team, 2023). Especially with smaller

companies with more straightforward operations, the extra time, resources, and expense of

deploying “ABC” accounting may not be efficient or cost-effective (Indeed Editorial Team,

2023). Such appears to be the case with Wet Suit World, with seemingly straightforward, mass-

produced manufacturing operations, creating virtually similar products. The primary cost

variable between the different wet suits pertains to size and material thickness, which we can

deduce are functions of the amount of material needed. Calculating the per-unit material cost for

each production run combination would be relatively common sense and simple, allowing Wet
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Suit World to easily determine that X amount of raw material produces Y number of small-sized

suits with the thinnest 2-millimeter thickness, and that same X amount of raw material would

most definitely produce fewer units of 3XL suits with the thickest 7-millimeter insulation. Such

math can be easily accomplished without the need to implement a potentially costly and time-

consuming ABC accounting method.

Conclusion

Given the analysis above and the understanding of Wet Suit World ’s relatively

straightforward, mass-production business model of creating uniform products, a similarly

straightforward accounting method would seem to be the most appropriate. As such, a process-

based accounting method is the one recommended to Wet Suit World. Should Wet Suit World

continue to grow and expand their offerings to include a wid er line of products with more

variation and/or custom piecework, at that time it would be appropriate to revisit this analysis

and perhaps consider switching to another costing method.

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References

Heisinger, K., & Hoyle, J. B. (n.d.). Accounting for Managers.

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

Indeed Editorial Team (2023, March 10). Activity-based costing (ABC): Advantages and when to

use. Indeed. https://www.indeed.com/career-advice/career-development/activity-based-

costing-advantages

Indeed Editorial Team (2022, June 24). Job order costing vs process costing. Indeed.

https://www.indeed.com/career-advice/career-development/job-order-costing-vs-process-

costing

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

https://library.ku.ac.ke/wp-

content/downloads/2011/08/Bookboon/Accounting/managerial-and-cost-accounting.pdf