BUS 5110 - Managerial Accounting

Written Assignment Unit 1

17 November - 24 November

Dr. Angela Palmer

Professor
Instructions for submission

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..

• Kindly take note that the author followed the instruction of 2-3 pages only (excluding cover paper, references,
and appendices).
• The author also observed the APA style in establishing citations and references.
• Before giving your marks, please check all the parts of the paper such as the references and appendices, it is at
the last pages of this article.
 Introduction

Cost accounting is the process of tracking and assessing a company's cost structure and allocating

expenses to cost items, which are often commodities, services, and other operations of a firm. Cost accounting

is advantageous because it allows organizations to understand where their money is being spent, how much

money is being produced, and where money is being wasted. Cost accounting, in a nutshell, is a management

approach to operational analysis.

Three of the most popular costing methods organizations use are Job order costing, Process costing,

and activity-based costing. This paper will compare the methods and consider both benefits and shortfalls of

each of the costing methods.

Job Order Costing

When customers place orders for small, one-of-a-kind quantities of things, the procedure of job order

costing takes place. This approach determines the price of each product and ensures that the cost is reasonable

for a customer to purchase while allowing the firm to profit.

Data from various financial sources, such as material costs, payroll records, supplier invoices, and

overhead allocations, may be acquired and monitored using a job order costing system. An accountant will

utilize these resources to gather data and calculate or monitor it using a job cost sheet. They may also utilize

a task order database to track each product using a unique identification number issued. Each item tracked in

the task order costing system should include a job cost record that contains the materials used to make it, the

number of people who worked on it, the time it took to create it, and the manufacturing overhead for that

product.

One advantage of job order costing is that it allows managers to calculate the profit made on activities,

allowing them to decide whether specific projects are profitable to pursue in the future. This is ideal for

businesses that provide highly specialized services, such as contractors and consultants. Furthermore, job

order pricing allows managers to track individual and team performance in cost management, efficiency, and

productivity.

The disadvantage of job order costing, however, is that employees must account for all materials and

labour used on the project. For example, consider a construction company that uses the job order costing
approach. The contractor must keep track of every wood, nails, screws, electrical fixtures, paint, and other

materials used on the project and staff lunch breaks and hours worked and that would be difficult and will

somehow outweigh the benefit provides by job order costing method.

Process Costing

Process costing, a system for collecting and assigning production expenditures to the units produced,

is another extensively used costing approach. When mass-producing substantially similar items, a processing

cost technique is used (Horngren et al., 2012)

When mass manufacture of similar goods is involved, and the costs associated with individual units

of output are indistinguishable, process costing is the ideal method to use. This method assumed that the cost

of each manufactured product is the same as the cost of all other manufactured items. Costs are accumulated

during a specific period, summarized, and then evenly dispersed to all units manufactured within that time.

The benefit of process costing is that it simplifies record-keeping by focusing on statistical

calculations rather than actual inputs. Furthermore, process costing provides managers with detailed

information about the production statistics of specific departments or workgroups. This arrangement is ideal

for constant industrial situations such as factories and utility companies.

A variety of factors influence costing procedures, one of which is the accumulation of cost errors

throughout the production system. Because of manufacturing cost inaccuracies, cost accounting systems

might incur significant drawbacks as process costing does not assign corporate expense to commodities like

direct allocation does.

Activity-based Costing

Another popular costing method is activity-based costing, one of the most effective cost system

optimization methods. Activity-based costing (ABC) improves the accuracy of a costing system by

designating individual activities as the underlying cost elements. In general, an activity is a single event, task,

or unit of labour that is carried out to achieve a specific purpose. For example, product design, machine setup,

machine operation, and product distribution are all instances of such jobs (Horngren et al., 2012).

In contrast to the old method, activity-based costing (ABC) establishes actual and logical costs by

attributing overhead to tasks, processes, or products based on the actions that generate them. In activity-based

costing, overheads are absorbed following the activities that create them. For example, procurement
expenditures may be divided into three categories: placing an order, receiving and inspecting, and storing. In

another example, inspection costs are allocated according to the number of times a product is checked, and

order placement costs are distributed proportionally to the number of times orders are placed, and so on.

Finally, the entire overhead for all three activities is calculated and assigned to jobs, processes, or products.

Activity-based costing is a more exact method of determining the cost of a product or service,

resulting in more precise price decisions. It raises managers' knowledge of overheads and cost drivers and

highlights inefficient and non-value-added procedures that may be decreased or eliminated. The benefits of

the ABC technique are its ease of use, more exact product costing, and more effective cost management.

Other benefits of the ABC methodology over other costing techniques include reduced allocation bases, ease

of use, and a direct relationship to output volume.

However, there are several drawbacks to activity-based pricing. Several disadvantages of the ABC

method of costing include the following: it is nearly impossible to allocate overhead costs to specific

activities, the selection of both activities and cost drivers may be inappropriate, the complexity of the ABC

costing exercise may make it difficult to justify to stakeholders, and the benefits of the ABC process may

outweigh the cost of implementation.

Cost Method Proposal for Wet Suit World Company

Process costing is the most efficient strategy for a corporation to use when creating a large number

of comparable items. This method minimizes costs when manufacturing is continuous or in big batches, and

it is difficult to identify a single input cost to a separate individual output.

Processing costs are justifiable when individual units' special prices or values are unimportant in the

grand scheme of things. For example, Wet Suit World Company, a firm that creates wet suits for water

activities like snorkelling and scuba diving, would find it impractical to construct each garment individually

or manage the same material and labour expenditures associated with each wet suit per client. As a result,

job order costing is a less efficient accounting system since monitoring expenditures for each suit

manufactured is more expensive than tracking expenses for each batch of suits produced. In general, when

tracking a product's expenses on an individual basis is impractical or economically impossible, process

costing is the best costing approach to use.

 References

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