Question

Make a comment relating to posts and reply to one where you can add additional discussion to the topic.

The topic: (In Chapters 1 to 3 you were introduced to Managerial Accounting Concepts and how they can be applied in job order costing or process costing. In chapter 4 you focus on alternative methods of assigning the overhead costs regardless of whether it is job order costing or process costing. You are to think of a business that you know either as an employee or consumer. Should they use process costing or job order costing and which method of overhead allocation would best serve this business. )

The post:

Last year I worked at David's Bridal in NYC. David's Bridal should use process costing because the nature of the business is such that each dress is ordered from the store and then customized (altered) afterwards. For example, 3 women who order the same dress in a size 6 will receive the same exact dress, and then afterwards they can go to the alterations department to do things like make the dress shorter or sew on a belt. Because they initially receive the same exact dress as one another, process costing is most effective. For overhead allocation, David's Bridal should use the departmental overhead rate method. This would work better than a plantwide method because, for example, wedding dresses take more labor hours and more materials to make than bridesmaids dresses, so they should have different overhead rates applied to one another.

Answer 1

I^{st Part}

Job Costing:

The category of basic costing method whicjh is applicable where work consist of seperate contracts, jobs,or batches each of which is authorised by specific order or contract.

• According to this method costs are collected and accumulated according to jobs, contracts, product or work orders.
• Each job or unit of production is treated as seperate entity for the purpose of costing
• Job costing is carried out for the purpose of ascertaining cost of each job and takes into account the cost of material. labour and overhed etc.
• Seperate cost sheet should be prepared for each job

Overhead Allocation:

Overhead can cause problem for organisation that use job costing. Without allocating overheads to jobs, we do'nt have an acuurate idea of cost of the job. So we are using estimated cost in the absence of actual cost as same can be ascertained only at the end of the year.

Most of the business complete budget prior to beginning of each year. So this budget include estimted overheadand estimated activity.So we can use thvose estimates to calculate a rate (Predetermined Overhead Rate) that we can apply to our jobs.

Perdetermined Overhead Rate = Estimated Overhead/ Estimated Activity

Process Costing:

It is defined as a method of cost accounting where by cost are charged to process or operation and averaged over units produced.

• It is used in the industries where material has to pass through two or more process for being converted into final product.
• Seperate account for each process is being opened and all expenditure pertaining to a process is charged that process account.

Allocation Overhead Cost:

Activity based costing is the one of the method of allocating overhead to product. Rather than treating overhead as huge block of cost that is charged out per product or per hour, activity based cost attempt to bifurcate overheads into several activities. It then goes onto identify what drives these activity costs(cost driver).

Steps for Activity Based Costing

1. Identify the key activity that consume resources and incur overheads with an organisation
2. Group together the costs that relate to each activity-this group is a cost pool
3. Determine what drives activity costs (cost driver) and also the cost per cost driver for each activity.
4. Based on actual number of cost drivers, charge cost to product/services.

If I am working in an manufacturing company as an employee, i will blankly suggest to follow activity based costing as method of overhead absorption as it overcome the drawbacks of traditional mehtod of absorption costing by identifying each cost driver and also the activity that drives the cost. So that we can absorb the overhead to concerned cost driver and it helps to identify cost drivers for managerial decision and cost control.

2^nd Part

Process costing are applied when one of the following features are satisfied;

1. Each plant or factory is divided into number of processes, cost centres or department and each such division is a stage of production or process.
2. Manufacturing activity is carried out continuously by means of one or more processrun sequently, selectively or simultaneously.
3. Output of one process become the input of the another processes.
4. The end product usually is of like units not distinguishable from one another.
5. Production of product may give raise to joint and/or by-products.

Rather than using a platwide method to allocate all of the overhead costs, we can breakup overhead by department by using departmental overhead rates.we have the flexibility to use a different activity or cost driver for each department. Some departments rely heavily on manual labor but other departments rely heavily on machinery. Direct labor hours might been a good indicator of cost in some departments but machine hours might work better for others.

So in this case, use of departmental overhead rate by David's Bridal is better than as compared to plantwide method since, latter will not give flexibility to use a different activity or cost driver for each department.