Question

Discuss the two costing accounting systems? Provide 2 examples companies that would use these methods. What is cost allocation? How do you calculate the predetermine overhead rate?

Answer 1

The two cost accounting systems are 1) Job Order Costing System and 2) Process Costing System.

Job order costing system is used where the specifications of the production is unique and where specific orders have received for the final product for example, Rolls Royce where it designs each car according to the specifications of the customers so to account the cost of such cars, the job order costing system is used for each type of such cars separately.

Process costing system is used where the output of one process becomes the input for subsequent processes or in simple terms, companies that manufactures similar type of product at mass or bigger level. for example, Volkswagen cars where the production volume of cars is huge with similar type of features uses the process cost system to account the costs involved at different processes.

Cost allocation is a process to allocate the total costs to the number of units produced at different cost pools. For example, to manufacture 10,000 units in 4 different cost pools, each of such cost pools produced 1,000 units, 4,500 units, 2,000 units and 2,500 units, the company has incurred a total cost of $100,000 and the company when it calculates the price of each of such cost pool, it needs to know how much cost is incurred for each of such cost pool so total cost of $100,000 is divided by total units of 10,000 that will give the unit cost as $10 so to know the total cost allocated to first cost pool, it is calculated as $10 * 1,000 units that will give the $10,000 so this cost of $10,000 is allocated to the first cost pool, similarly it allocates the total cost to all the remaining cost pools.

Predetermined overhead rate is calculated by dividing the total estimated costs by the total direct labor hours or machine hours on which company has decided as base.

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