Question

Submit a paper which is 2-3 pages in length, exclusive of the reference page. The paper should be double spaced in Times New Roman (or its equivalent) font, which is no greater than 12 points in size. The paper should cite at least three sources in APA format.

In this paper, please discuss the three costing methods of job order costing, process costing, and activity-based costing. 

Define each method and explain when it is best suited to be used. 

Compare and contrast the methods and consider their benefits and shortfalls. 

Use the information provided to propose which cost method should be used to allocate costs.

Wet Suit World is a company that manufactures wet suits for use with water sports such as snorkeling and scuba diving. The suits are made in sizes small through 3x extra large with levels of insulation layers of 2 millimeters, 5 millimeters, and 7 millimeters. They come in black with the Wet Suit World logo imprinted across the chest. The materials are the same for all of the suits, though they vary in thickness. All suits undergo the same production and quality inspection processes.

There is no one “correct” answer to the proposed cost allocation method as long as the answer is well-supported based on the week’s learning.

Superior papers will include the following when responding to the assignment question:

Define the three costing methods.

Explain when each is most appropriately used.

Compare and contrast the methods, considering both benefits and shortfalls.

Provide a well-supported proposal for the cost method Wet Suit World should use.

Be sure to u
Add references

Answer 1

1).

A). JOB COSTING:

Job costing is a form of specific order costing which is adopted to execute the work strictly according to customer’s specification. The production process depends upon the number of orders received from customers.

As such production is not standardized and intermittent in nature. The goods manufactured are not for stocking but for immediate delivery once it is complete in all respects.

The cost is ascertained separately for each job as every work order differs from customers to customers. The purpose of job costing is to ascertain the profit or loss made on each job. Further cost of job is compared with the estimated cost to indicate whether estimation was defective or the actual cost incurred is excessive. Such an analysis helps in taking remedial action to improve efficiency and also facilitate revision of estimates.

Suited For:

• Furniture Making
• Construction
• Architecture
• Painting

B). PROCESS COSTING:

Process costing is used when there is mass production of similar products, where the costs associated with individual units of output cannot be differentiated from each other. In other words, the cost of each product produced is assumed to be the same as the cost of every other product.

Under this concept, costs are accumulated over a fixed period of time, summarized, and then allocated to all of the units produced during that period of time on a consistent basis. When products are instead being manufactured on an individual basis, job costing is used to accumulate costs and assign the costs to products. When a production process contains some mass manufacturing and some customized elements, then a hybrid costing system is used.

Suited For:

• Paint Manufacturing
• Petroleum Products
• Cool Drinks
• Beverages

C). ABC COSTING:

Activity based costing (ABC) assigns manufacturing overhead costs to products in a more logical manner than the traditional approach of simply allocating costs on the basis of machine hours. ABC costing first assigns costs to the activities that are the real cause of the overhead. It then assigns the cost of those activities only to the products that are actually demanding the activities.

ABC costing recognizes that the special engineering, special testing, machine setups, and others are activities that cause costs—they cause the company to consume resources. Under ABC, the company will calculate the cost of the resources used in each of these activities. Next, the cost of each of these activities will be assigned only to the products that demanded the activities.

Suited For:

• Home Builders
• Where Overheads are more and Activities are more

2). Differences

	Job Costing	Process Costing	ABC Costing
	Based on Customer order	Based on The Continuity of process	Based on Activities Involved
	Low Production Volume	High Production Volume	High or Low Production Volume
	Heterogeneous Products	Homogenous Products	Both type of products
	Job Cost sheet is used	Production report is used
	Unit cost computed by job	Unit cost computed by department	Unit cost computed by Activity
	Cost transferred when each job is completed	Cost transferred when each Accounting period is ended
Benefits
	Suitable for cost plus contracts	Average cost can be easily determined	Accurate cost calculation
	Actual cost and Budgeted cost are compared	Allocation of expenses easily made	Correct Decision Making
	Budgetary Control system is followed	Standard costing is followed	Exact profit can be known
Limitations
	Job costing is expensive	Average cost is used to value the products	Identification of Activities is more work involved
	No Standardization in Job Costing	This cost may not be suitable for all purposes	Very costly to implement
	More Manual Work Involved	Cannot provide accurate estimate when there is single process and many products	More Technical work is required

3). Costing Method Useful For Well Suit World Following are the points to be considered Material is same for all suits All suits undergo same production All suits undergo same quality inspection process By the above observation, Process Costing is suitable for Well Suit World