Question

You learned about job order costing and activity-based costing. Each method deals with manufacturing overhead in a different way. There are various implications with how costing is done. The following items will help stretch your thinking a bit.

1. Why should an employee have some understanding of costing if they are not in the accounting department?
2. Explain how the method of costing used will impact the company with: (A) the quoting of customer jobs and (B) gross margin/profit on the Income statement.

Answer 1

Solution-1: An employee must have some understanding of the costing if they are not in the accounting department because it eases them to understand how products costing are done and can be changed depending upon the methodology adopted.

Solution-2 In Job order costing, overheads are allocated at predefined date rates, however, in activity based costing (ABC), depending upon cost drivers overheads are allocated to the products. Activity based costing is a better costing methodology as job order costing results in over/ under overhead allocation.

(A) the quoting of customer jobs: Quoting basis Job order costing, due to over allocation of overheads, the Company may loose the job because of higher pricing. However, in case of under allocation, will lead to losses to the Company. ABC is a best methodology to calculate the job costing to avoid over/ under overhead allocation.

(B) Gross margin/profit on the Income statement: Due to over allocation of overheads, gross margin/ profit will decrease and in case of under allocation, gross margin/ profit will increase. However, this is not the case with ABC methodology.