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JOB COSTING SYSTEM AND ACTIVITY BASED COSTING
EXECUTIVE SUMMARY:
This report summarizes the meaning, method and use of job costing system, with relevant examples. This also focusses on computation of work in progress inventory, finished goods inventory of the firm, using the job costing approach.
The concept of underapplied and overapplied overheads are also discussed in this report, extending them further to the treatment of underapplied and overapplied overheads in the financial accounts.
Further, the concept of Activity Based Costing is explained and a comparison of job costing system with the Activity Based Costing is drawn and explained with the impact it may have on the management accounting of the firm.
Contents
What is Job costing?    4
Computation of work in process inventory:    5
Computation of cost of 15000 units produced during the year:    5
Underapplied and overapplied overheads:    6
Computation of under/over applied overheads:    6
Activity Based Costing:    7
Advantages of Activity-Based Costing    8
Disadvantages of Activity-Based Costing:    9
References:    10
What is Job costing?
Job costing is a method of accounting for costs associated to each job separately. It is used quite often for jobs, which are unique and require different raw materials, time, efforts, have different complexity than the other jobs being done by the firm.
It helps managers to keep job wise track of expenses being incurred. It helps in determining the manufacturing costs systematically by splitting the cost between direct costs, indirect costs, overheads, etc.
It is useful when the products being made by the firm are not identical to each other.
As per Job costing, Managerial and cost accounting, by Larry M. Walther, Christopher J. Skousen,
Job costing is best suited to those situations, where goods and services are produced upon receipt of a customer order, according to customer specifications, or in separate batches, therefore this method is more commonly known as Job order costing method.
For example, a ship builder would likely accumulate costs for each ship produced, similarly companies engaged in construction of houses, would prefer to use job costing method as each job is somewhat unique. Materials and labor can be readily traced to each job and the cost assignment shall follow logically.
As per Cost Accounting, Analysis and Control, 1984, by Layne, W. Armand, Rickwood and Colin, Cost accounting is one of the gifts to the management accounting framework, that allows the management to compute the best possible costs including all allocations and overheads, for a job being undertaken by the management.
Using job costing approach requires various steps, including:
· Direct Materials: Direct materials are those materials and supplies that are consumed during the manufacture of a product.
· Direct Labor: production or services labor that is assigned to a specific product, cost center, or work order.
· Overheads: Overheads refers to the costs, that are incurred over and above the costs specifically attributable to a job. These overheads, though, are not directly linked to one job in specific but they support the performance of all the jobs. Examples of such overheads could be rent, thought the rent being paid, cannot be attributed to any specific job undertaken during the period, but no job could be undertaken during the period, since, without a factory location, manufacturing couldn’t be done, Thus, rent is an example of fixed overheads.
According to Eric Kohler, “Job costing is a method of cost accounting whereby cost is compiled for a specific quantity of product, equipment, repair or other service that moves through the production process as a continuously identifiable unit,...