Question

What are the main differences between job, process, and activity-based costing? How is manufacturing overhead calculated in each of the costing methods? How are variances identified?

Answer 1

Difference between job costing,prcocess costing,active based costing:-

job costing:-

1.job refers to specific contract work order or arrangement,where work is executed as per customers requirements.

2.specialisd production based on customers specification.

3.costs are compiled by reference to job,irrespective of its time of completion.

4.in job costing ,comparatively less scope for cost reduction.

5.there is no transfer of costs from one job to another.

process costing:-

1.In process costing,process refers to stage in manufacture where raw materials are converted from one form to another.

2.standardised mass production.

3.cost unit is output of the process.

4.cost of one process is transfered to next process.

5.in process costing,scope of cost reduction is high,due to mass production and economies of scale.

Active based costing:-

ABC, is not suitable for external reporting, small-business owners may find that accounting for overhead under an activity-based approach can provide better information for making production decisions. Under activity-based costing, managers first determine the activities that go into producing a product.

calculation of manufacturing overheads;-

1. Add the total cost of materials purchases in the period to the cost of beginning inventory, and subtract the cost of ending inventory. The result is the cost of direct materials incurred during the period.
2. Direct labor. Compile the cost of all direct manufacturing labor incurred during the period, including the cost of related payroll taxes. The result is the cost of direct labor.
3. Overhead. Aggregate the cost of all factory overhead incurred during the period. This includes such costs as production salaries, facility rent, repairs and maintenance, and equipment depreciation.
4. Add together the totals derived from the first three steps to arrive at total manufacturing cost.   

Variances are identified as differences to expectations. Expectations a as the budget or last year’s account balances versus the actual for this month, this year to date, etc.