Question

Assume that you work for a Fortune 500 level company at corporate headquarters. Due to your excellent performance and the fact that the CEO of your firm noticed that you had listed on your resume' that you had taken a graduate-level Management Accounting course from a reputable institution, the CEO has sent you an email containing a request that you respond to two very important questions.

#1. What criteria should the operating units (i.e. producing segments of the firm) use when deciding whether to use job-order costing or process costing approaches for costing the products they produce?

#2. For costs that cannot be traced, what tests should a cost allocation basis (not the cost allocation method) meet before that cost allocation basis (direct labor hours, machine hours, direct labor cost, etc.) can be used to allocate costs in the organization? In other words, what are the criteria that make a certain measurement or basis used to perform cost allocation a good one to use? (the question is asking about the choice of basis (direct labor hours, direct labor costs, machine hours, number of units shipped, number of machine setups, etc.) to be used as a gauge or measure of how much corresponding cost to assign.)

Answer 1

The decision depends on various factors while choosing between job and process costing .These may include:

One of the factor will be that the products manufactured are either same or unique. In case of unique products it is significant to use job costing as the cost relating to each job will be computed seperately based on that specific job.However. if in case of same products the company can use process costing as same amount of cost is incurred for all units.

Cost allocation means assigning the costs to the products and it is based on what is used in the manufacture of these goods.

While choosing the basis of cost allocation , the following are considered:

• Identify the products to which cost is allocated.
• Identify the cost sto be allocated.
• Method to be used for the allocation.

After considering all the above the basis of cost allocation is selected.All the items used in the production process are considered and then identify the most appropriate cost pool.For example, cost relating to labour work has to be apportioned on the basis of labour hours.