Job Order Costing and ABC

This assignment delves into job order costing, a method used to calculate the cost of individual products. It examines how overhead costs are allocated using predetermined rates and discusses the potential discrepancies that can arise. The assignment further explores activity-based costing (ABC), a more refined approach for allocating overheads based on product consumption. Students analyze a case study involving job order costing, calculate product costs, and assess the impact of overapplied overhead. Finally, they evaluate the benefits of implementing ABC for improved cost accuracy and decision-making.

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

1MANAGEMENT ACCOUNTING
Table of Contents
Introduction:...............................................................................................................................2
Body:..........................................................................................................................................2
Suitable Circumstances for Job Order Costing System:........................................................2
Work-in-Process Balance:......................................................................................................3
Cost of Chairs in Finished Goods Inventory:.........................................................................3
Computation of Over or Under Applied Overhead:...............................................................4
Different Treatments for Adjusting Over Applied Overheads:..............................................5
Approach for Adjusting Over Applied Material Cost:...........................................................6
Activity Based Costing..........................................................................................................7
Conclusion:................................................................................................................................8
Reference List............................................................................................................................9

2MANAGEMENT ACCOUNTING
Introduction:
Turramurra furniture manufactures furniture, specialised for using with computers.
There are different furniture, produced under different job numbers. This report is prepared to
determine the cost of each type of furniture and explain the process of cost estimation under
job order costing system.
Body:
Suitable Circumstances for Job Order Costing System:
There are various circumstances in which the process of job order costing system can
be used by the organizations and individuals. The job order costing system is usually
employed by the firms that produce a number of products that are different in nature. It is an
extensively exploited costing system in the production along with the industries associated
with the service sector. The production firms that are using the job costing process generally
gain he orders for customised services and products (Öker and Adıgüzel 2016). These orders
that are customised in nature are known as batches or jobs. When a firm grants jobs and
orders for various products, the cost assignment to the product becomes a complex task. In
this scenario, the record of the cost for every specific job is kept due to the fact that each of
the jobs has various products and the various costs related with it (Trépanier et al. 2014). The
cost per unit of a specific job is calculated by dividing the overall cost allocated to that job by
the number of specific units associated with the job. The three basic elements of job costing
system include the materials, labour cost and the factory overhead.
Work-in-Process Balance:
Particulars SE523 PS612 CH421 DS174 Total

3MANAGEMENT ACCOUNTING
Opening WIP 20000 25000 15000 0
Quantity Completed 20000 0 15000 5000
Closing WIP Units 0 25000 0 0
Opening Value of Work-in-
Process
$
300,000
$
300,000
Raw Material $
221,000
$
221,000
Labour Cost $
200,500
$
200,500
Manufacturing Overhead $ 97,500 $ 97,500
Closing Value of Work-in-
Process
$ 0 $
819,000
$ 0 $ 0 $
819,000
Cost of Chairs in Finished Goods Inventory:
Particulars Amount
Direct Raw Material $ 13,800
Labor Cost $ 43,200
Manufacturing Overhead $ 22,000
$ 79,000

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Opening WIP $ 431,000
Less: Closing WIP $ 0
Cost of Goods Manufactured $ 510,000
Quantity Completed 15000
Cost per Units completed $ 34
Particulars Opening
Inventory
Units
Complete
d
Total
Total Units 19400 15000 34400
Units Sold 19400 1600 21000
Closing Units 0 13400 13400
Cost per unit $ 35 $ 34
Value of Closing Inventory $ 0 $ 455,600 $
455,600
Computation of Over or Under Applied Overhead:
Particulars Amount
Annual Predetermined
Overhead
$
4,500,000
Budgeted Machine Hours $ 900,000

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Predetermined Overhead
Rate
$ 5
Machine Hours up to May'17 835000
Machine Hours in June'17 49900
Total Machine Hours 884900
Applied Manufacturing
Overhead
$
4,424,500
Actual Overhead up to May'17 $
4,105,000
Actual Overhead in June'17 $ 217,000
Total Actual Overhead $
4,322,000
Over Applied Overhead
Expenses
$ 102,500
Different Treatments for Adjusting Over Applied Overheads:
Dr. Cr.
Date Particulars Amount Amount
First Treatment:
6/30/2017 Manufacturing Overhead Dr. $

6MANAGEMENT ACCOUNTING
A/c. 102,500
To, Cost of Goods Sold A/c. $
102,500
Second Treatment:
6/30/2017 Manufacturing Overhead
A/c.
Dr. $
102,500
To, Work-in Process A/c. $
102,500
Work-in-Process A/c. Dr. $
102,500
To, Cost of Goods Sold A/c. $
102,500
Approach for Adjusting Over Applied Material Cost:
In order to mitigate the issues that is associated to the over or under application of the
overhead material, Turramurra Furniture Company looks to debit the manufacturing overhead
and credit the cost of goods sold and the second treatment of the manufacturing overhead is
debiting the manufacturing overhead cost with the work in process and debit the work in
process with the cost of goods sold. This would be able to mitigate the issues that is present
with the over and under application of the manufacturing overhead.

7MANAGEMENT ACCOUNTING
Activity Based Costing
The organization is concerned with their calculations and the application of the
overhead and is of the idea of using Activity Based Costing as it is looking for an expansion
of their product range and is even concerned about the overhead applications. Activity Based
Costing is generally utilised by the manufacturing companies as it improves the reliability of
the cost data and thereby manufacturing close to the true and authentic cost and better
categorising the costs that has been incurred by the firm during the time of the manufacturing
process (Tsai et al. 2014). The costing process is exploited in the product costing, target
costing, customer profitability, service pricing and profitability assessment. It has been
hugely popular as the companies can create an improved corporate strategy and concentration
if the costs are grasped effectively. The process of Activity Based Costing makes use of the
numerous costing pools managed by the activity in order to allocate the overhead costs
(Dong, Liu and Lin 2014). The idea has been that the activities are needed to manufacture the
products like the establishment of the machinery, purchasing the materials, examining the
finished products and assembling the the products. These activities can be expensive and
therefore the expense of the activities needs to be allocated to the product reliant on the usage
of the activities of the products.
An activity is a method that looks to consume the overhead resources. The aim is to
understand all the operations that is essential to manufacture the products of the organization
(Coşar, Guner and Tybout, 2016). This step requires the overhead costs related with every
activity that is to be assigned to the operations. Hence, Activity Based Costing is essential for
considering the product range and the overhead applications.

8MANAGEMENT ACCOUNTING
Conclusion:
It can be stated from the above discussion and calculations that job order costing is
very effective for determining the cost of different specialized products. The management has
allocated the overhead to the product cost at higher rate than the actual overhead rate.
However, the management can adjust the over applied overhead in different methods and
under both the methods, the cost of goods sold would get reduced.
The company can minimize the discrepancy related to the overhead allocation by
introducing activity based costing method. It would help the company to allocate the
overheads as per the benefits consumed by each product and also to determine the cost more
appropriately.