Question

1. Job order manufacturing and process manufacturing are two major costing systems used in manufacturing. Answer the following questions regarding these two systems: a. Compare and contrast the two costing systems. b. Which costing system should a service firm, such as an advertising agency use? c. How do these two systems provide decision-making information? ?

2. Describe activity based costing.? a. Give two examples where activity based costing is preferable over traditional costing. b. How is activity-based costing useful for decision making? c. Discuss the three overhead rate methods used in activity-based costing and consider their relative usefulness.

Answer 1

             1)

• A) Comparison – Job order cosing and Process Costing both has the same basic objective,To Determine the cost of products. Both job and process cost systems use predetermined overhead rates to apply overhead. The flow of costs through the manufacturing accounts is basically the same.
• Contrast - Job costing accumulates costs by individual jobs. Process costing accumulates costs by process or department.In Job order costing Unit costs are computed by job on the job cost sheet where as in Process Costing Unit costs are computed by department on the department production report.
• B) In a job-order costing system, companies assign costs such as direct labor or direct materials directly to jobs as they are incurred.Hence in a service sector industry like advertising Job order costing system will be best suitable.
• C) These two costing systems helps management with pricing decisions and helps in allocating overhead rate to each cost unit and ultimately helps in decision making process of the management.

2)

Activity based costing helps allocate overhead expenses to jobs and products based on the amount of the activities required to produce the product instead of simply estimating how much each job uses. ABC costing focuses on identifying activities, or production processes, that are used to process a job.

2) a) Companies that manufacture a large number of different products prefer an activity-based system because it gives more accurate costs of each product. With the growth and development of industry and business, the complications in the processes of manufacturing or providing services have increased significantly. An average product manufacturing requires more than 3 to 4 processes. To deal with these complications Activity based costing system is proved beneficial.Big Companies like HP and IBM uses activity based costing system.

2) b) ABC Costing system assesses the costs associated with specific activities and resources and links those costs to specific internal and external customers. This cost information then can be adjusted to account for anticipated changes and to predict future costs.Thus Activity based costing system can provide a basis for management decision making.

2) c) Overhead rate on the basis of no. of labor hours

           Overhead rate on the basis of direct material used

           Overhead rate on the basis of electricity unit consumed

These overhead rates are utilized to compute the overhead cost of any organization and designate taken a toll for compelling cost management. It is more accurate costing system to allocate the accurate cost of each department. It provides useful financial and nonfinancial measures