Companies choose their costing method based on their business activities and processes, as well as the products and services they offer. A company can be a manufacturing, merchandising, or service organization; this also impacts which costing method will be most useful for its purposes. As a part of costing, the company also needs to decide how to classify overhead costs using either traditional or activity-based costing (ABC).
In this written assignment, you will choose a company, consider its business and costing requirements, and recommend a costing system that will work best for the business.
Think about a company you know. This could be a current or past employer or a company you admire. Consider its business activities and the type of products and services offered. Based on what you have learned so far, write a short paper that reflects on the different costing methods and speculates on how they might apply to your selected company.
Specifically, you must address the following rubric criteria:
- Company Overview: Identify the company you selected and provide a brief overview of its business.
- Is it a manufacturing, merchandising, or service organization?
- Costing Methods: Compare the job order and process costing methods, and explain how each of these can be applied to the company.
- How could the costs differ if one method is chosen over the other?
- Factory Overhead: Outline possible indirect or overhead costs the company may need to account for, and identify the type of costing the company might use for these costs.
- If the company decides to use activity-based costing (ABC), what are some activity bases (cost drivers) it might use to allocate these costs?
- Recommendation: Based on your analysis, recommend a costing method for the company, and explain why you think this method will work best for the business.
Guidelines for Submission
Submit your assignment as a 2- to 4-page Word document. Sources should be cited according to APA style.
ACC 202 Transcript for Welcome to Module Three
[00:00:03.06] INSTRUCTOR: In Module Two, you learned about job order and process costing systems. In this module, we will dive into allocating factory overhead cost. In job order costing, factory overhead is assigned based on multiple production department factory overhead rates. On the other hand, in process costing, factory overhead is assigned on a single plantwide factory overhead rate.
[00:00:29.22] Both of these are good systems to use, but in some cases, a company needs to assign factory overhead cost more specifically so that the cost of a product is not distorted. In such cases, companies can use another cost accounting system called activity-based costing, or ABC. This system uses multiple factory overhead rates based on different activities. Activities are the type of work or actions involved in manufacturing or service processes. For example, assembly, inspection, and engineering design functions are activities that might be used to allocate overhead.
[00:01:11.97] In this module, we will look at activity rates and how factory overhead is allocated using the activity-based costing system. We will also look at some examples of costing that are not appropriate and the impact these can have on over- or underpricing. So, the next time you go into a store, take a look at the merchandise. What kind of cost are manufacturers likely to have incurred in making those products? By critically thinking and seeing how both successful and unsuccessful businesses operate, you can get a better sense of what might or might not work for your future career, business, or organization.
[00:01:53.25] Enjoy the module. And don’t be afraid to ask for help.