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    Costing Choices: Process, Job and Activity-Based Methods

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    (1) Select a costing method: process, job, or activity based. Describe the nature of your chosen method. What types of organizations should choose that method? How is this method different from the costing methods you did not choose? Use your selected costing method to create a real-life business management scenario that includes realistic numbers. What management decisions may one make based on your scenario?

    (2) Identify an industry in which a job order cost system or a process cost system could be used. How might each of the cost systems be implemented within this particular industry? Does an industry exist in which the job order and the processing cost systems would not be suitable? Explain your rationale.

    (3) Suppose you are the manager of a widget-production company. The company's two support departments, Purchasing and Human Resources, are currently allocated amongst its three manufacturing departments: Laminating, Fabricating, and Assembling. Currently, the support department's costs are divided equally among the three manufacturing departments. The company has conducted an analysis using the number of employees in the manufacturing departments as the activity driver. The results of the analysis indicate Fabricating would receive 50% of the total costs of Purchasing and Human Resources, Laminating would receive 30%, and Assembling would receive 20%. As a manager, would you suggest the firm adopt the new activity-driven allocations or retain the current allocation method? Choose a method of allocation and provide your rationale. Identify at least two additional cost drivers that could be used to allocate the costs of the two support departments and explain the rationale you used to select the additional cost drivers.

    (4) What type of costing system would you use for the company you selected for the Small-Business Idea Paper which was due in Week Two? Why did you pick this costing system? Review another student's response to this question. Reply to that student and indicate if you agree with his or her choice of costing system and with his or her rationale. In your response, recommend another costing system to consider. Provide your rationale for your recommendation.

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    Solution Preview

    These are my notes to help you get started:


    I choose job costing. This means that I will track the cost of each customer order (the "jobs") and put the cost of the materials and labor that are associated with that job as a direct cost. Then, with common costs, the overhead costs of production, I will allocate them to the jobs based on a cost driver that is most causally related to the overhead pool costs.

    This is different from process costing and activity based costing because process costing does not separate job costs, all costs are co-mingled and spread to output evenly for each unit (cost per unit is the same for all produced units). With activity based costing, I would use more than one overhead pool to allocate overhead to the jobs.
    Here is the job cost for my floral business for the most recent month:

    Lane Wedding (large)
    Overhead applied.........$300
    Total cost of job..........$1,260 vs price of job bid at $1,500 ...

    Solution Summary

    Two paragraphs for each question are provided. A numerical example is provided for the first question.