Management Accounting

The current report focuses on analyzing the costing system for conducting business operations by Connectta Limited. It discusses the suitability of using job costing system, balance of work-in-process inventory account, cost of chairs in finished goods inventory, over-applied or under-applied overhead for the year, alternative accounting treatments for under-applied or over-applied overhead balances, and benefits of activity-based costing over job costing system.

Running head: MANAGEMENT ACCOUNTING
Management Accounting
Name of the Student:
Name of the University:
Author’s Note:
Course ID:

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Executive Summary:
The current report would focus on analysing the costing system for conducting its business
operations by Connectta Limited. From the case information, it has been identified that the firm
follows job costing system in order to make sound disclosure of business costs. In case of job
costing system, the overhead costs related to the service departments are assigned to the
production departments and hence, there is limitation of cost pools in the system. However, the
activity-based costing procedure assists in creating separate cost pools for the service activities
along with overhead costs associated with service activities, which are apportioned directly to the
specific products by applying the rates of cost drivers.

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Table of Contents
Introduction:....................................................................................................................................3
1. Suitability of using job costing system for an organisation:........................................................3
2. Balance of work-in-process inventory account of Connectta Limited:.......................................4
3. Cost of the chairs in finished goods inventory:...........................................................................5
4. Over-applied or under-applied overhead for the year:................................................................6
5. Alternative accounting treatments under job costing system for under-applied or over-applied
overhead balances:...........................................................................................................................6
6. Benefits of activity-based costing over job costing system:........................................................7
Conclusion:....................................................................................................................................10
References:....................................................................................................................................12

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Introduction:
The current report would focus on analysing the costing system for conducting its
business operations by Connectta Limited. From the case information, it has been identified that
the firm follows job costing system in order to make sound disclosure of business costs. The
paper would focus on evaluating the costing methods, which are available to the organisation and
the possible ways through improvements could be made. Different costs are calculated for
Connectta Limited. Moreover, the alternative accounting treatments in relation to overhead costs
and their likely effects have been discussed adequately in this paper. The analysis would be
performed for under-applied or over-applied overhead costs and the ways of treating them from
the cost accounting perspective. The report would shed light on the role performed by activity-
based costing system and the techniques through which the management of the firm could be
assisted to make decisions for ensuring economic growth in future. In other words, the benefits
of activity-based costing system would be discussed for mitigating the deficiencies inherent in
traditional costing system.
1. Suitability of using job costing system for an organisation:
The section has laid stress on different aspects related to the cost accounting reporting
framework and the framework that is followed by Connectta Limited. In the existing market
situation, a firm is required determining the appropriate project costs in order to estimate profits
and product prices that would be offered to the customers (Balakrishnan, Labro & Soderstrom,
2014). Job costing system is described as the system that a firm uses for meeting the orders made
by the customers. From the viewpoint of the business, the management of Connectta Limited
applies job costing technique for controlling the use of raw materials. The customer orders are

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taken into account by the organisations so that the overall demand could be met accordingly. By
considering the significant business activities, the management has a number of alternatives
regarding the selection of the appropriate costing system, which requires application depending
on business operations. The reason behind the use of job costing system is to estimate the total
cost of the manufacturing overheads and the firms depending more on customers for fulfilling
the production requirements coupled with generating operating revenue (Banker & Byzalov,
2014).
The method is viable for those firms functioning in the manufacturing industry and the
costs are disclosed in the costing reports, which are formulated by complying with the job
costing method principles. Various firms are identified to be using the job costing system for
effective presentation of business expenses and they mainly include hospitals, manufacturers and
other businesses (Brewer, Garrison & Noreen, 2015). Hence, job costing method is a procedure
of determining cost for only one cost unit, which is for a specific job. This system is considered
to be beneficial under certain circumstances, which are discussed mainly as follows:
Job costing system is used when any firm is providing any particular product depending
on specific needs of the customers.
Another situation where this system is applied is when a firm produces a variety of
identical or alike products (Christ & Burritt, 2015).
2. Balance of work-in-process inventory account of Connectta Limited:

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Woking note:
3. Cost of the chairs in finished goods inventory:
Working notes:
It has been identified that Job CH 291 is engaged in chair production, which mandates the
need to determine the cost of the specified job.
The firm is identified to be using the First-In-First-Out (FIFO) method of inventory
system. Hence, the finished goods inventory units constitute of the units completed during the
December month.

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4. Over-applied or under-applied overhead for the year:
For calculating the actual manufacturing costs, indirect labour and supervisions are taken
into account. Therefore, the manufacturing overhead is over-applied by $7,500.
5. Alternative accounting treatments under job costing system for under-applied or over-
applied overhead balances:
The business organisations generally incur different types of indirect costs so that
necessary support could be provided to the operating functions and business activities and hence,
there is appropriate calculation of total business costs (Collis & Hussey, 2017). The concept of
over-applied or under-applied overhead has emerged when the management of a firm is involved
in charging overhead costs more or less than applied. Therefore, there would under-application
or over-application of overhead and this has to be treated appropriately by the management of
Connectta Limited. The overhead expenses of a firm could be treated appropriately by
considering the costing method used by the management (Fullerton, Kennedy & Widener, 2014).
By complying with the processes, the common method pertaining to the treatment of
under-applied or over-applied overhead expenses is by closing the same from the cost of goods
sold of the firm. Hence, such treatment aids in depicting that the actual cost incurred in cost of
goods sold is more than the actual records, which is maintained by the management of the firm.
In this regard, it is necessary to state that under-applied overhead occurs in a condition when the

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cost of applied overhead goes below the actual overhead expenses of the firm (Hopper & Bui,
2016).
When there is under-application or over-application of overhead cost and if the same
does not have important nature, treatment would be made as period costs and it would be closed
with the cost of goods sold account of the firm. However, if over-applied or under-applied
overhead costs are found to be significant, it mandates the need of incorporating the same within
the pertinent accounts. The pertinent accounts have to be considered from the perspective of the
costing system of the concerned entity.
By considering the above-discussed aspects, it could be said that under-applied or over-
applied disposal of manufacturing expenses could be formulated in two ways. One method is to
charge manufacturing overhead to the cost of goods sold account or the same is possible to be
applied on finished goods inventory, cost of goods sold and work-in-process inventory in the
cost percentage carried by the pertinent accounts (Kamal, 2015). However, the final treatment
would be similar for both alternatives.
6. Benefits of activity-based costing over job costing system:
Activity-based costing system is an accounting procedure, which is utilised by an
organisation for sound cost identification pertaining to business operations and they are assigned
to the overhead expenses appropriately. With the help of this method, it becomes possible to
realise the association among costs, overhead expenses and activities produced by the company
(Kaplan & Atkinson, 2015). The system is considered as the most popular costing procedure in
terms of cost identification, since it could be connected with the essential business activities. The

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overhead costs of the entity assign the indirect costs appropriately when they are contrasted with
the conventional methods of costing such as the job costing system.
The manufacturing companies mainly use the system because there is improvement in the
reliability of cost data and hence, sound presentation of business expenses could be conducted
accordingly. Due to this, the management of the firm could make effective decisions regarding
the cost components (Klychova, Faskhutdinova & Sadrieva, 2014). Certain ways are inherent by
which activity-based costing system could mitigate the loopholes in the job costing procedure of
Connectta Limited, which are elaborated below:
Assignment of cost:
Both activity-based costing and job costing system conduct costing related to a cost
object; however, there are differences in the methodologies of both the systems. For example, it
is estimated that any particular job of Connectta Limited consumes significant amount of labour
and materials, which could be measured appropriately. Hence, it is possible to conduct the
costing of the two systems similarly like the job costing system, which is made by multiplying
the labour hours utilised by the component by the per hour labour rate (Lavia López & Hiebl,
2014). In addition, the overhead portion of the form would be added, which has been consumed
on the part of the component.
Under the traditional costing technique, this procedure is conducted by loading a
percentage of the total overhead cost of the company to the component. However, in case of
activity-based costing procedure, the actual activities of overhead have to be determined, which
are performed on the component. The cost drivers are used for measurement of overhead
activities. Per unit cost of each activity is calculated by dividing the overhead cost pool of that

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activity by the units of cost drivers at the firm level (Lukka & Vinnari, 2014). After the process,
it is necessary to multiply the units of cost drivers used actually by the component with the cost
driver rate. By using the same, the actual overhead activity cost has to be ascertained, which is
conducted on the component. This results in better assignment of overhead expense in activity-
based costing system when it is contrasted with the job costing system.
Two-stage assignment:
In case of job costing system, the overhead costs related to the service departments are
assigned to the production departments and hence, there is limitation of cost pools in the system.
However, the activity-based costing procedure assists in creating separate cost pools for the
service activities along with overhead costs associated with service activities, which are
apportioned directly to the specific products by applying the rates of cost drivers (Otley, 2016).
Hence, by utilising the activity-based costing procedure, there is no need to assign or reapportion
overheads associated with the service departments.
Utilisation of historical costs:
The historical orientation between job costing system and activity-based costing system
differs from each other. Generally, any entity uses the actual historical cost for formulating the
manufacturing cost standards (Parker & Fleischman, 2017). Such costs generally take into
consideration rework, inefficiency, duplication, waste and redundancy. By accepting historical
costs and depicting the costs on standards do not provide support to the continuous improvement.
Under any competitive situation where the competitors are found to be proactive in activity and
waste elimination improvements, an organisation could move out of its standards for effective
fulfilment of the same (Shields, 2015).

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Although historical resource costs are used in the calculations of activity-based costing
system, the orientation in activity-based costing system is not similar to that of job costing
system. It has been identified that some proponents of activity-based costing system lays
additional emphasis on the future competitive positions and historical cost is used only as a
baseline for improvement in business operations and activities (Tappura et al., 2015).
By taking into account the above analysis, Connectta Limited would be able to mitigate
the deficiencies in the current costing system by using the activity-based costing system within
the firm.
Conclusion:
The above discussion makes it evident that the management of Connectta Limited applies
job costing technique for controlling the use of raw materials. The customer orders are taken into
account by the organisations so that the overall demand could be met accordingly. By
considering the significant business activities, the management has a number of alternatives
regarding the selection of the appropriate costing system, which requires application depending
on business operations. The reason behind the use of job costing system is to estimate the total
cost of the manufacturing overheads and the firms depending more on customers for fulfilling
the production requirements coupled with generating operating revenue.
Under-applied or over-applied disposal of manufacturing expenses could be formulated
in two ways. One method is to charge manufacturing overhead to the cost of goods sold account
or the same is possible to be applied on finished goods inventory, cost of goods sold and work-
in-process inventory in the cost percentage carried by the pertinent accounts. In case of job
costing system, the overhead costs related to the service departments are assigned to the

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production departments and hence, there is limitation of cost pools in the system. However, the
activity-based costing procedure assists in creating separate cost pools for the service activities
along with overhead costs associated with service activities, which are apportioned directly to the
specific products by applying the rates of cost drivers.

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