Question

Q. Explain the similarities and differences between job-order cost and process cost systems.

Q. Differentiate between traditional costing and activity-based costing.

Q. Explain the benefits and limitations of activity-based costing.

Q. Identify activities and cost drivers.

Answer 1

Q1. Similarities between job-order costing and process costing:

1. Both job costing and process costing are used for allocation of expenses(material,labour,overheads) to end products in manufacturing

2. Both the costing techniques require almost same inventory accounts used for recording accounting entries

3. The method for treatment of over-absorbed and under-absorbed overheads of both the costing systems are the same

4. Manufacturing accounts are maintained in both job costing and process costing

Differences between job-order costing and process costing:

1. In case of job costing,costing is involved for individual orders whereas process costing is the costing of large volumes and allocated to processes

2. Normally job costing is used for unique or customised products whereas process costing is used for standardised products produced in large volumes

3. Cost is ascertained individually for each job in case of job costing,however cost is transferred from one process to other in case of process costing

Q2. Differences between traditional costing and activity-based costing:

1. Traditional costing nowadays is and obsolete method of costing whereas Activity Based costing is frequently used by various companies which are target oriented

2. Activity Based costing helps company to identify the needs of keeping or eliminating certain activities to add value to the product which is certainly not possible in case of traditional costing

3. Traditional costing focuses on the structure rather than the process,but in case of Activity Based costing the focus in mostly on activities and processes rather than on the structure

4. The cost provided by Activity Based costing is accurate whereas traditional costing accumulates values arbitrarilt

Q3. Benefits of activity based costing:

1.Activity based costing brings reliability and accuracy in determination of product costs

2. Activity based costing helps in identifying the real nature of cost behaviour and helps in reducing costs

3. Multiple cost drivers are used by Activity based costing which are transaction based rather than product volume

4. Managerial decision making is improved greatly by use of Activity based costing as managers can use more reliable product cost data

Limitations of activity based costing:

1.Installation of Activity based costing system is complex and expensive as it has numerous cost pools and multiple cost drivers

2. Difficulties also emerge while implementation of Activity based costing such as selection of cost drivers,assignment of common costs etc.

3. Activity based costing is favourable mostly to the large firms and mostly have disadvantages in smaller firms

Q4. Cost drivers are the structural determinants of the cost of an activity,reflecting relationships and linkages that affect it. Thus cost drivers determine the cost behaviour within the activities.

Activities cause costs and therefore a link should be established between activities and product.Cost drivers are the link between activities and cost.