Question

Develop a hypothetical company. Discuss and describe in detail what costs the product would entail, as well as the type of costing system you would use.

Answer 1

This is an event management company, getting contract of the successful execution of various events like marriage ceremony, birthday occasion, inauguration ceremony, etc.

Relating costs are as below:

Variable costs: these are the costs directly attributable or varying with the production units. Examples of these costs are catering charge (based on per plate), rose to visitors (based on per visitor attended), etc.

Fixed cost: these are the costs not varying with production units. Examples are rent of a banquet hall, electricity charges, salary of the administrator, etc. Whatever be the number of attendants these costs doesn’t change.

Semi-variable cost: these partly variable and partly fixed like supervision charges, printing of invitation cards, etc. A supervisor gets $2,000 from 0 to 1,000 visitors and then the rate increases by $10 for each additional visitor. Suppose there are 1,100 visitors in an occasion; the supervisor’s salary would be the combination of fixed and variable costs; ($2,000 + 100 × $10 =) $3,000.

Each event is a separate job and each job has a unique number. Therefore, job-order costing is appropriate here. The company uses job-order costing.