Question

Phil and Jim were roommates in college and have always competed against each other. Since graduating from college, both men were hired at the same company. The company pays bonuses at the end of year based on performance, which also includes a weekend on their boss's yacht. Two years in a row Phil managed to surpass Jim's performance. This year, Jim is determined to get the highest bonus. Imagine you are the accountant and knowing that these two men are rivals, answer the following questions

1. Compare and contrast job order and ABC costing.

2. Determine which costing method would make it easier to detect budget variances or discrepancies.

Answer 1

1. Job order costing and activity based costing are both methods of allocating overheads in a manufacturing entity. Job order costing is used to allocate overheads for products or process that are not identical and each job is unique. Usually it is applied in a industry where products are customized or made to order as per the customer's requirement. The overheads are applied based on the resources required for each job. On the other hand activity based costing is a modern method of allocating overheads based on a pre determined activity cost pools. The overheads are allocated on the rates determined through the activity that it uses the most. For example if one activity uses more of machine hours, then the overheads are allocated on the based on machine hours for that particular activity.

2. Activity based costing in my opinion will make it easier to detect budget variances since it is more accurate,provides an in depth analysis of the variance activity wise and makes it easy to understand the variances.