Question

BTN 2-4) Assume you are preparing for a second interview with a manufacturing company. The company manufactures customer-order holiday decorations and display items. During your first interview, you learned that the managers are not currently pleased with the timeliness of information and inventory measurements. Discuss both A) what type of cost accounting system this company should use, and B) the documents that you would recommend as part of the cost accounting system.

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Answer 1

A).

There are few popular cost accounting system like Backflush costing, Standard Costing, Job Costing, Process Costing, Marginal costing etc. Each Costing method has its own applicability. Generally in manufacturing concerns JOB COSTING or PROCESS COSTING system are used.

In above case the company manufactures customer-order decoration and display item. However they are not happy with the timeliness of inventory measurement. Process costing is used where the same type or product or homogenous product are manufactured involving continuous manufacturing process. Whereas Job Costing is used where costs are accumulated by jobs or orders. The hit point is production is done as per customer's request or specification.

Therefore in above case JOB COSTING system of cost accounting is more appropriate.

B)

Following Documents should form part JOB Costing system -

• Material Requisition Form - Details about the request raised for purchasing and issuance of material to the production department are basic source document.
  
• Time Sheet - It keeps the record of entry and exit of employee. This gives the details about the labour hour worked for computation of payroll, overtime.
  
• Overhead Cost sheet - This form source document for allocation of factory/ manufacturing overhead over each department. These are then allocated to the respective JOB ORDERS.
  
• Job Cost Sheet - This is the end document which summarizes the all direct labour, direct material and other overhead cost. For example vehicle service center (FORD) prepare Job cost sheet to allocate mentioned overhead that job done.

These are the source documents which are foundation of costing accounting system. Various accounting records maintained using these are Journal entries, General Ledger Account, Cost control account, WIP account etc.

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