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Written Assignment Unit 2

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38 views5 pages

Written Assignment Unit 2

Uploaded by

lahiru madushan
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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UNIVERSITY OF THE PEOPLE

MANAGERIAL ACCOUNTING

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.
Introduction

Cost accounting is a method that keeps track and evaluates cost


expenditures of this particular company and also engages the
allocation of the monies from the expense to different cost items,
often which are commodities, services, or other firm's activities. This
is the cost of accounting and it contributes to the precise definition
of transactions, which helps in boiling down the myriad investment
alternatives into reasonable units. Cost accounting is useful because
it helps organizations to find out how much money is being
produced, where their expenditure is focused, and how much money
is being wasted. The summary description of cost accounting is the
approach that managers take to operation analysis. There are three
most common types of costing methods that are used by companies
namely Job order costing, Process costing, and activity-based
costing. This project will identify and evaluate the methods and also
analyze the positive and negative aspects of each of the costing
methods

Job Order Costing

The job order cost method can be used in both manufacturing and
service businesses
and is best suited to industries in which small jobs are undertaken
with each job having its own characteristics. For example, a
consultancy business might engage in a number of different jobs for
a particular client in which case the costs associated with each job
are accumulated separately, or a manufacturing business might
produce a bespoke product for a customer (Al-Masoodi, Hayder,
2020).

The process of job order costing occurs when clients place orders for
tiny, unique quantities of goods. This method establishes the price
of every product and makes sure that it is affordable for a customer
to buy at the same time as making a profit for the company. A task
order costing system can be used to gather and track data from
multiple financial sources, including material costs, payroll records,
supplier bills, and overhead allocations. These tools will be used by
an accountant to collect data and use a task cost sheet to calculate
or track it. They might also track each product with an assigned
unique identification number by using a task order database.

A job cost record that details the materials used, the number of
workers, the amount of time required to complete the task, and the
manufacturing overhead for each item tracked in the task order
costing system should be included. Managers can determine
whether a certain project is profitable to pursue in the future by
using task order costing, which gives them the ability to calculate
the profit made on operations. For companies that offer highly
specialized services, like consultants and contractors, this is perfect.
Moreover, managers can monitor team and individual performance
in terms of productivity, efficiency, and cost control thanks to job
order pricing.

However, one drawback of job order pricing is that workers have to


keep track of all the labor and materials utilized on the project. Take
a look at a construction company that applies the job order costing
method, for instance. The laborious task of keeping track of all the
wood, nails, screws, electrical fixtures, paint, and other supplies
used on the project, as well as the staff's lunch breaks and hours
worked, will in some ways overshadow the advantages of using the
job order costing approach. Procedure Costing Another popular
costing strategy is process costing, which is a method for gathering
and allocating production expenses to the units produced.

In a process-costing system, the unit cost of a product or service is


obtained by assigning total costs to many identical or similar units
of output. In other words, unit costs are calculated by dividing total
costs incurred by the number of units of output from the production
process. In a manufacturing process-costing setting, each unit
receives the same or similar amounts of direct material costs, direct
manufacturing labor costs, and indirect manufacturing
costs(Horngren,2021: 721).

Process costing is the best approach to utilize when mass


production of comparable commodities is involved and the costs
related to individual output units are indistinguishable. This
approach was predicated on the idea that the cost of every
manufactured good is equal to the cost of every other manufactured
good. Expenses are accrued over a predetermined time frame,
compiled, and then distributed equally across all units produced
within that period. Process costing has the advantage of making
record-keeping easier by concentrating on statistical computations
rather than actual inputs. Moreover, managers can obtain
comprehensive insights into the productivity figures of certain
departments or teams through the use of process costing.

For continuous industrial settings like factories and utility firms, this
structure is perfect. Cost errors accumulate throughout the
production system, which is one of the many elements influencing
costing procedures. Cost accounting methods may have serious
disadvantages due to manufacturing cost mistakes since process
costing does not allocate corporate expenses to commodities in the
same way that direct allocation does. Costing depending on
Activities One of the best techniques for cost system optimization is
activity-based costing, which is another widely used costing method.
By identifying specific activities as the underlying cost components,
activity-based costing (ABC) increases the accuracy of a costing
system. An activity is often defined as a single action, event, or unit
of labor completed with the intention of achieving a certain goal.

Activity-based costing (ABC), as opposed to the previous approach,


assigns overhead to activities, processes, or products according to
the actions that produce them. This method determines actual and
logical costs. Overheads are absorbed after the activities that
generate them in activity-based costing. Purchasing expenses, for
instance, can be separated into three groups: ordering, receiving
and inspecting, and storage. Another example would be the
distribution of inspection expenses based on how often a product is
inspected, order placement charges based on how often orders are
placed, and so on.

Eventually, a calculation is made and tasks, processes, or products


are given the total overhead for all three actions. A more accurate
way of estimating the cost of a good or service is through activity-
based costing, which leads to more accurate pricing decisions. It
increases managers' awareness of overheads and cost-drivers and
draws attention to non-value-added, wasteful processes that may be
curtailed or eliminated. The simplicity of usage, accuracy of product
costing, and enhanced cost control are the advantages of the ABC
approach. The ABC methodology has a clear relationship to output
volume, is easy to implement, and has lower allocation bases than
other costing techniques.

However, activity-based pricing has a number of disadvantages. The


near impossibility of allocating overhead costs to particular
activities, the possibility of inappropriate activity and cost driver
selection, the difficulty of convincing stakeholders of the ABC
costing exercise's benefits, and the possibility that the process's
advantages outweigh its implementation costs are just a few
drawbacks of the ABC costing methodology.

Cost Method Proposal for Wet Suit World Company

When producing a big number of similar things, process costing is


the most cost-effective approach a company can take. When
manufacturing is done continuously or in large quantities, this
strategy reduces costs because it is challenging to link a single input
cost to a distinct individual product. When the unique prices or
values of individual units are not significant in the overall scheme of
things, processing charges can be justified. For instance, Wet Suit
World Company, a company that makes wet suits for aquatic sports
like scuba diving and snorkeling, would find it unfeasible to make
each item by hand or to handle the same labor and material costs
for every wet suit per customer.
Because it is more expensive to manage expenses for each suit
manufactured than it is to track expenses for each batch of suits
produced, work order costing is therefore a less effective accounting
approach. Process costing is generally the ideal costing technique to
utilize when tracking a product's expenses individually is
impracticable or economically prohibitive.

References:

Al-Masoodi, Hayder. (2020). Cost Accounting Job order.


10.13140/RG.2.2.20781.41445.
Cost accounting Charles 13E T. Horngren & others, 2021.

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