Activities and Activity Measures Estimated Overhead Cost Supporting direct labour (DLHs) $552,000 Setting up machines (setups) 132,480 Parts administration (part types) 780,000 Total $1,464,480 Activities C18R G19R Total Supporting direct labour 12,000 12,000 24,000 Setting up machines 864 240 1,104 Part administration 600 960 1,560
Process Costing
Process costing is a sort of operation costing which is employed to determine the value of a product at each process or stage of producing process, applicable where goods produced from a series of continuous operations or procedure.
Job Costing
Job costing is adhesive costs of each and every job involved in the production processes. It is an accounting measure. It is a method which determines the cost of specific jobs, which are performed according to the consumer’s specifications. Job costing is possible only in businesses where the production is done as per the customer’s requirement. For example, some customers order to manufacture furniture as per their needs.
ABC Costing
Cost Accounting is a form of managerial accounting that helps the company in assessing the total variable cost so as to compute the cost of production. Cost accounting is generally used by the management so as to ensure better decision-making. In comparison to financial accounting, cost accounting has to follow a set standard ad can be used flexibly by the management as per their needs. The types of Cost Accounting include – Lean Accounting, Standard Costing, Marginal Costing and Activity Based Costing.
Wolseley’s dilemma of Traditional Costing versus Activity Based Costing
Wolseley Manufacturing Corporation manufactures various electronics products and follows a traditional (job-order) costing system in which it applies manufacturing
|
|
C18R |
G19R |
|
Direct materials per unit |
$10.20 |
$50.50 |
|
Direct labour per unit |
$8.40 |
$25.20 |
|
Direct labour hours per unit |
0.40 |
1.20 |
|
Annual production |
30,000 |
10,000 |
The company's estimated total manufacturing overhead for the year is $1,464,480 and the company's estimated total direct labour-hours for the year is 24,000.
The company is considering using a variation of activity-based costing to determine its unit product costs for external reports. Data for this proposed activity-based costing system appear below:
|
Activities and Activity Measures |
Estimated Overhead Cost |
|
Supporting direct labour (DLHs) |
$552,000 |
|
Setting up machines (setups) |
132,480 |
|
Parts administration (part types) |
780,000 |
|
Total |
$1,464,480 |
|
Activities |
C18R |
G19R |
Total |
|
Supporting direct labour |
12,000 |
12,000 |
24,000 |
|
Setting up machines |
864 |
240 |
1,104 |
|
Part administration |
600 |
960 |
1,560 |
Mike, who is the controller of the Company, is currently overseeing the project to switch from traditional costing to Activity-Based costing. He is in a meeting with the Cost Accountant of the company. The Controller goes over the data and makes the following comments:
“Activity-Based Costing is a revelation in the modern-day world of manufacturing Industry. If we are correctly able to categorize the various nature of work into essential levels, then we can dramatically trace the precise nature of the overheard activity.”
Jacob, the Cost Accountant, quips, “how can we classify those levels of activities? Do we have some mechanism to identify them?”
Mike responds, “Yes! We do.”
Jacob then laments the pitfalls of the
Jacob adds, “Another consideration to evaluate is the relationship between the cost of maximum (budgeted) capacity and idle capacity, since the company is likely to operate at maximum capacities during the time of peak demand. Moreover, our long-term goals of stable cost predictions and waste minimizations should also be kept in mind.”
“Alright! Let us calculate and analyze the quantitative and qualitative aspects of the data and other factors we have discussed in the meeting today and prepare the preliminary report for the CEO by this weekend.” Mike with the final comments!
Questions
a. Determine the
b. Determine the manufacturing overhead cost per unit of each of the company's two products under activity-based costing system.
c. Compare the results in part a and b under both costing systems and specify the differences in both systems.
d. What is the significance of the Activity Costing System that Mike is referring to?
e. How is ABC system different from traditional costing system?
f. The use of which activity level, budgeted (same as expected) or maximum capacity, is consistent with ABC? Explain.
g. How might the use of ABC based on maximum capacity activity level enhance a firm's ability to compete on price? Explain.
h. If you were to recommend one of the costing systems for Wolseley Inc., which one
would you pick and why?
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