Job Costing vs Activity Based Costing

This article compares job costing and activity based costing methods and their impact on manufacturing cost per unit. It explains the allocation bases and cost drivers used in each method. The article also provides a case study example of Samsung's use of process costing and the weighted average method.

Answer to Question 1:
1. Job Costing Method:
This is one of the simplest method of costing wherein all the costs incurred by the
company in form of direct material, direct labour and overheads are accumulated and
applied to the job of the company evenly on one single basis be it the machine hour or
labour hour or labour cost or any other single base of allocation of overhead costs to
the products of the company. (Bragg, 2019)
The manufacturing costs per unit for each job using the job costing method is
computed as below:
Manufacturing Cost per Unit - Job Costing
Method
Particulars
Job 2
(Amount
)
Job 3
(Amount
)
Direct Material $9,700 $59,900
Direct Labour $750 $11,250
Overheads:
$115/hr for 25 Hrs $2,875
$125/hr for 375 Hrs $43,125
Total Manufacturing Cost $13,325 $1,14,275
No. of Units 10 200
Manufacturing Cost/unit $1,332.50 $571.38
Under simple job costing method, the total overhead of the company is applied at a
flat rate of $115 per machine hour. The cost per unit comes out to be $1332.50 for job
2 and $571.38 for job 3.

2. Activity Based Costing
This form of costing though time taking gives a more logical way of allocating
overhead to the products of the company. This approach begins with identification of
activities that causes overheads for the company. Identifies the cost drivers against
each of the identified activity and then allocates them to the products based on their
usage of the activity. (AccountingCoach.com, 2019)
The manufacturing costs per unit for each job using the Activity Based Costing
(ABC) method is computed as below:
Manufacturing Cost per Unit - ABC Method
Particulars Job 2
(Amount)
Job 3
(Amount)
Direct Material $9,700 $59,900
Direct Labour $750 $11,250
Overheads:
Material Handling
$0.40/part for 5000 parts $200
$0.40/part for 2000 parts $800
Lathe Work
$0.20/turn for 20000 turns $4,000
$0.20/turn for 59250 turns $11,850
Milling
$20/Hr. for 150 Mc hr. $3,000
$20/Hr. for 1050 Mc hr. $21,000
Grinding
$0.80/part for 500 parts $400
$0.80/part for 2000 parts $1,600
Testing
$20/unit for 10 units $200
$20/unit for 200 units $4,000
Total Cost $22,250 $1,22,250
No. of Units 10 200
Manufacturing Cost/unit $1,825 $552
Under ABC method, the total overhead of the company is segregated under various
activity and these activities are evaluated on the basis of cost drivers. The allocation
rate for each activity is allocated to the job based on the transaction used on the usage
of the activity drivers. (Turney, 1997)

Based on this the cost per unit comes out to be $1,825 for job 2 and $552 for job 3.
3. A summary of the manufacturing cost per unit for the jobs under each method is as
below:
Particulars
Job 2
(Amount
)
Job 3
(Amount)
No. of Units 10 200
Manufacturing Cost/unit using Job Costing $1,332.50 $571.38
Manufacturing Cost/unit using ABC method $1,825.00 $552.00
We clearly see that for Job 2 the per unit cost has increased by 37% from $1,332.50
per unit to $1,825 per unit. Further, for Job No. 3 it has decreased by 3.39% from
$571.38 to $552.00. This is because when we move from job costing method to ABC
method the overhead costs are allocated on the basis of usage of the activity and not
simply allocating them based on products produced.
The application of ABC method in the factory revealed that products with a low
volume of production have a higher per unit costs while products that have a high
volume of production have a lower per unit cost. This is because costs such as
material handling is inversely proportional with the number of parts that are
manufactured and under ABC that is getting allocated on number of parts rather than
labour hours as in case of job costing method.
The cost allocation for overheads differ significantly under both job 1 and job 2
because of the allocation base under both the methods. Under ABC method, the entire
overhead is identified and divided under 5 different activities of the manufacturing
process. The costs for each activity are identified and the costs are allocated to the
jobs based on their usage of the activity identified.
The table below shows how the costs per unit differ under both the methods:
Activity
Usage Based on
Analysis of Activity
Area Cost Drivers
Usage Assumed with Direct
Manufacturing Labour-
Hours as Application Base
Job 2 Job 3 Job 2 Job 3
Material Handling 20% 80% 6.25% 93.75%
Lathe Work 25% 75% 6.25% 93.75%
Milling 12.5% 87.5% 6.25% 93.75%
Grinding 20% 80% 6.25% 93.75%
Testing 4.8% 95.2% 6.25% 93.75%

This difference as portrayed by the costing method is vital to any organization for
their pricing decision and negotiation with the clients. This information helps them in
better decision making by monitoring and controlling costs divided as per the indirect
activity of the organizations.
The above analysis shows how the cost of job number 2 is under estimated and that of
job 3 is overestimated. This must have led the company in pushing job 2 in the market
whereas the profitable would have been to job 3. Activity Based Costing improves
cost allocation and helps firm in accurate pricing of the product.
In short, the per unit cost differs under both the methods owing to the difference in
allocation bases of the overheads. While under job costing, the overheads are
distributed evenly, under ABC the overheads are allocated on the basis of usages of
the activities involved in the production.

Answer to Question 2: Process costing
Companies that produce mass products of similar goods uses process costing as the costs of
one product are not significantly different from the others. The cost of each unit produced is
identical to every other product undergoing the same process and the process costing is an
accurate measurement of costs of the product. (Lucey, 2009)
Under process costing, costs over a certain period of time is collected, summarized and then
allocated evenly to the number of products manufactured by the company in that same period
of time (Bragg, 2019).
Process costing is a branch of costing, which is generally adopted by factories or units that
produces standard, identical products and undergo various identical processes before
converted into final product. Process costing computes the cost of the units at each stage of
production and reveals to the management accurate costs for informed decision making in the
favour of the company (Business Jargons, 2019).
The weighted average method of process costing uses the total costs of the beginning
inventory and add to it the current costs of the product to establish the total costs and then
distributes it to the product to arrive at the average cost per unit. (Horngren et al., n.d.)
Here, for Samsung the assembly division of the company uses process costing method and
employs the weighted average method.
a. The first step is to identify the equivalent number of units. The same is computed as
below:
Flow of Production
Physical
Units
(Watches)
Equivalent Units
Direct
Material
s
Conversion
costs
Beginning Work In Progress (1 January) 500
Started in 2017 3,400
Units to account for 3,900
Completed during 2017 3,100 3,100 3,100
Ending Work In Progress (31 December 2017) 800
Equivalent Units (70% Direct Materials) 560
Equivalent Units (30% Conversion) 240
Accounted for 3,900
Equivalent units of work done to date 3,660 3,340

Explanation:
1. The company started its year with a beginning WIP of 500 units and added another
3,400 units at the beginning of the year. The total of the WIP introduced and fresh
units started in the period is the total number of units that need to be accounted for in
the current year. (Garrison, Noreen and Brewer, n.d.)
2. The company completed a total of 3,100 units in the tear. Since the units are
complete the total for both direct material and conversion is 100% and thus the
physical units to be accounted for direct material and conversion are 3,100 as well
(Jiambalvo, n.d.)
3. The company ends the year with 800 units still in production or at the Work in
Progress stage. These units as mentioned in the problem are 70% complete with
respect to material and 30% complete with respect to conversion. Thus the equivalent
unit of ending WIP with respect to material is computed as 800 * 70% = 560 units.
The equivalent unit of ending WIP with respect to conversion is computed as 800 *
30% = 240 units (Copeland, 2000).
4. The total equivalent unit for total work done in the year is units completed added with
the equivalent units against the ending WIP.
Thus, the total equivalent units using the weighted average method is 3,660 for direct
material and 3,340 against conversion.
b. Here, we need to compute the cost per equivalent unit for the year and then allocate
them between the units completed and those which are in progress.
Flow of Production Total Production
Cost
Direct
Materials
Conversion
costs
Step
3
Beginning Work In Progress (Given)
Equivalent Units (80% Direct Materials) $4,000
Equivalent Units (40% Conversion) $400
Beginning Work In Progress - Total $4,400
Costs added in current Period (Given) $1,10,000 $85,000 $25,000
Total Cost to account for $1,14,400 $89,000 $25,400
Explanation:
1. The company started its year with a beginning WIP of 500 units with a total cost of
$5,000 towards direct material and $1,000 towards conversion cost. These units as

mentioned in the problem are 80% complete with respect to material and 40%
complete with respect to conversion. Thus, the total cost for direct material and
conversion is computed using total cost multiplied by the percentage completion
(Funnell and Williams, 1996).
2. The total costs added for the product during the year is considered as 100% as these
materials were introduced in entirety.
The next step is to compute the cost per equivalent unit based on above two computations of
equivalent units and total cost to be accounted for. This is computed as below:
Flow of Production Direct
Materials
Conversion
costs
Step
4
Cost incurred to Date $89,000 $25,400
Equivalent units of work done to date 3,660 3,340
Cost per equivalent unit of work done to date $24.32 $7.60
Explanation:
The costs incurred to date are divided by the total equivalent unit to arrive at the per unit cost
of each equivalent unit produced by the company in a year.
The last step is to assign this cost to the units completed and in progress which is as below:
Assignment of Costs
Total
Production
Cost
Direct
Materials
Conversion
costs
Step
5
Units Completed and Transferred Out (3,100) $98,957
3,100 units for $24.32 per unit $75,382.51
3,100 units for $7.60 per unit $23,574.85
Work in Progress, ending (800 units) $15,442
Equivalent Units - 560 units for $24.32/unit $13,617.49
Equivalent Units - 240 units for $7.60/ unit $1,825.15
Total Cost Accounted for $1,14,400.00 $89,000 $25,400
Explanation:
1. Here, the total costs are assigned to the completed units by multiplying the units
completed with the equivalent cost per unit as computed earlier.
2. Further, the total costs are also assigned to the units that are in progress at production
level based on equivalent units and cost per such equivalent unit. (Dummies, 2019).

3. We see that the total cost to be accounted for has been distributed within completed
and in progress units keeping the total cost same.

References
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Apr. 2019
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