BUS 5110: Managerial Accounting-Written Assignment Unit 2 1

The Cost Accounting Method for Wet Suit World Company

BUS 5110: Managerial Accounting -AY2021-T4

University of the People

Instructor: Dr. Angela Palmer

April 2021
BUS 5110: Managerial Accounting-Written Assignment Unit 2 2

Introduction

The proposed estimate of a product (costing) depends on the type of products a business

produces and the amount of effort that goes into analyzing the costs associated with the unit

product, the process and activity. The business therefore links the cost of production of a product

with the desired rate of return for those efforts.

The three costing methods to be discussed are the Job order costing, process costing and activity

based costing which have f their own methods, benefits and drawbacks.

JOB ORDER COSTING is a method of assigning or allocating a cost to a specific unit product.

This costing method is used by industries where we have different products and work orders

coming directly from the customer but takes only a short period to complete. The purpose of job

order costing is to be able to allocate the cost to each job. Job order costing is used by printing

presses, motor repair shops, automobile garages, film studios, engineering industries.

(Accounting, n.d.)

PROCESS COSTING is a method for allocation of cost for mass quantity of product.

According to Walther and Skousen (2009), Process costing is methodology used to allocate the

total costs of production to homogenous units produced via a continuous process that usually

involves multiple steps or departments but the physical nature of these “processes” makes it hard

to identify and associate specific units of direct labor and direct material with the final output.

(Process costing and activity-based costing, n.d.)

Some of the industries that uses process costing most are the continuous process industries such

as chemicals, textiles, paper.

BUS 5110: Managerial Accounting-Written Assignment Unit 2 3

ACTIVITY BASED COSTING (ABC) is calculated on the basis of assigning cost to the

activity, number of the activities and classification of the activities but not product and services.

According to Walther and Skousen (2009), a simplified explanation of ABC is that it attempts to

divide production into its core activities, define the costs for those activities and then allocate

those costs to products based on how much of a particular activity is needed to produce a

product.

Comparison:

Job Order Costing Process Costing Activity based Costing

Based on specific unit Based on continual process Based on activity
Differences Different products Simlar products Any type of product

Unit cost calculated by item Unit cost calculated by department Unit cost calculated by activity
Good for contract works Average cost easy to determined Total cost calculated accurately
Benefits Costs are traced to each job Costs are traced to the department Costs are traced to activity
Each department has its work in
pregress account Activities are easily monitored
Cost vary and not appropriate for all Costly and Not easy to
Shortfalls Vary from contract to another purposes implement

Manual work much involved Do not give accurate estimates Technicalities involved

Conclusion

The costing methods elaborated above have their own benefits and disadvantages which cannot

be interchangeable or used to achieve the same goal for different products or businesses. There is

therefore the need for cost accountants to select the appropriate costing method that suit their

pricing decisions.

A well-supported proposal for the cost method Wet Suit World should use is the Process

Costing because they use the material for all the suit which is appropriate for mass production.
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References

1. Accounting. (n.d.). Share and Discover Knowledge on

SlideShare. https://www.slideshare.net/ChandrakantPhad/accounting-66841019

2. Activity-based costing. (n.d.). Ebrary. https://ebrary.net/377/accounting/activity-

based_costing

3. Process costing. (2018, November 15).

principlesofaccounting.com. https://www.principlesofaccounting.com/chapter-20/process-

costing/

4. Walther, L. M. & Skousen, C.J. (2009). Managerial and Cost Accounting.

https://library.ku.ac.ke/wp-content/downloads/2011/08/Bookboon/Accounting/managerial-

and-cost-accounting.pdf