ACC310 Report: Job Costing vs Activity Based Costing Analysis

This management accounting report examines the costing methods employed by Network Clothing Company Pty Ltd, a garment manufacturer. The report identifies issues with the company's existing job costing system, particularly in allocating overhead costs, and explores the potential benefits of implementing activity-based costing (ABC). Through quantitative and qualitative analysis, including a comparison of cost allocation under both systems, the report demonstrates how ABC can lead to more accurate product costing, improved profitability, and better decision-making. The analysis highlights the impact of different costing methods on product pricing and profit margins, ultimately recommending the adoption of ABC to address the company's challenges and optimize its financial performance. The report includes detailed cost breakdowns, activity analysis, and a comparison of key financial metrics under both costing systems to support its conclusions.

Running head: MANAGEMENT ACCOUNTING
Management accounting
Name of the student
Name of the university
Student ID
Author note

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Executive summary
Aim of this study is to locate the issues that the manufacturing entity as well as the entire globe
is facing with the job costing system. The study will further determine whether the activity based
costing will be better approach for resolving the issues through conducting qualitative and
qualitative analysis.

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Table of Contents
Introduction......................................................................................................................................3
Problem statement...........................................................................................................................3
Quantitative and qualitative analysis...............................................................................................4
Conclusion and recommendation....................................................................................................7
Reference.........................................................................................................................................9

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Introduction
Network clothing company Pty Ltd that is based in Abbotsford, Australia was established
in the year 1988. The company is engaged in manufacturing the garments for all the markets and
ages. It manufacturers the clothes based upon the latest trend in the market and is well known for
providing the products as per the customer’s requirements. The entity in last year introduced
special fabric shirts and trousers for summer. Though the shirts are making profit, the trousers
seem less profitable irrespective of high sales. The report will mainly focus on the issues faced
by the entity and the issues it is facing regarding its existing system of allocating overheads.
Further, the report will focus on the activity based costing that may help the entity to overcome
the issue (Weygandt, Kimmel and Kieso 2015)
Problem statement
Job costing is an approach that accumulates cost of overheads, labour and materials for
any specific job that allows the managers keeping track of the expenses. It determines the
manufacturing costs through segregating them into overhead, labour and material costs and
estimates those costs at the actual value. However, this approach is more suitable when the
manufacturer manufactures only one product (Mitra 2016). As the company deals with various
types of clothes that is special fabric shirts and trousers to be taken into consideration for this
particular study, it requires to maintain separate data for shirts and trousers. As per the existing
approach the company allocate the cost of material and labour to manufacturing overhead. Major
problems involved in job costing approach that is currently faced by entire world as well as
Network Clothing company Pty Ltd are mentioned below –

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 It purely based on the costs and the major issues involved with this is to fix the price for
the completed process as costs are generally recorded at each of the steps. Hence, it does
not allow in preventing unwanted costs and expenses taking place in between the
procedures.
 This approach is expensive as the records are required to be maintained at each of the
steps of the process starting with material list to final product (Keiser, Garner and
Vandermar 2017)
 As no specific method is there to segregate the material cost and labour costs, exact
process is not there to estimate the job cost
 No control over the costs as price control and quality control are mad after estimating the
final price. Hence, likelihood is also there that there may exist some hidden costs as the
variation in price is only visible under this approach (Haroun 2015)
Quantitative and qualitative analysis
As the entity is considering that some issues are there with the allocation of the overheads
that has an impact on the pricing system it is thinking of adopting the activity based costing that
will enable the management in better allocation of the overheads that will lead to better pricing
system. Information gathered on sample basis for the year 2018 are as follows –
T-shirt Trousers
Units produced and sold 1700 1600
Cost per unit for direct material $ 350 $ 580
Cost per unit for direct labour $ 175 $ 280
The activities involved and total costs of overhead are detailed below –

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Inspection - $ 30,000
Sewing and pattern cutting - $ 200,000
Storage - $ 40,000
Boxing up - $ 80,000
Activities used by the products and cost drivers for overhead allocation are as follows –
Activity T-shirt Trousers Cost drivers
Inspection 760 210 Inspection
Pattern cutting and sewing 60 510 Machine hours
Boxing-up 4700 3500 Number of pieces
storage 120 270 number of boxes
Selling and administration expenses for trousers = $ 300,200,
Interest expenses = $ 40,500
Office rent = $ 42,800
Other details –
Under the existing system Trousers are sold at total cost plus 30% and the management is
willing to maintain the same price level under new system.
Overhead allocation based on the labour cost under job costing system as follows –

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Overhead allocation as per activity based costing –
As the lower profit generated by trousers have an adverse impact on the entity’s overall
profitability, the comparison under both the system is carried out as follows –

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It can be identified from above that using activity based costing the entity will be able to
increase the profit per trouser from $ 370.29 to $ 385.45 and the costs per trouser will be reduced
from $ 1234.30 to $ 1219.14.
Apart from the above the other benefits associated with ABC approach are as follows –
 It provides the realistic costs for manufacturing the particular product
 It recognizes inefficient procedures and targets for the enhancements
 It offers better understanding as well as justification regarding the costs under the
manufacturing overheads
 It determines profit margin for the product in more precise manner (Osadchy and
Akhmetshin 2015)

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Conclusion and recommendation
It can be concluded from above scenario that the company will be able to solve its issues
associated with existing system and generate higher profit with application of ABC approach.
Hence, it is recommended that the entity shall shift to ABC approach for allocating the overheads
related to products in more systematic way.

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Reference
Haroun, A.E., 2015. Maintenance cost estimation: application of activity-based costing as a fair
estimate method. Journal of Quality in Maintenance Engineering, 21(3), pp.258-270.
Keiser, S., Garner, M.B. and Vandermar, D., 2017. Beyond design: The synergy of apparel
product development. Bloomsbury Publishing USA.
Mitra, A., 2016. Fundamentals of quality control and improvement. John Wiley & Sons.
Osadchy, E.A. and Akhmetshin, E.M., 2015. Accounting and control of indirect costs of
organization as a condition of optimizing its financial and economic activities. International
Business Management, 9(7), pp.1705-1709.
Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Financial & managerial accounting. John
Wiley & Sons.