Lab Report: Cost Calculation and Analysis

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Analysis, Pages 3 (707 words)

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Abstract

This lab report explores cost calculation methods, specifically traditional plantwide manufacturing overhead rate and activity-based costing, using Job 351 as an example. It discusses the application of these methods to calculate the cost of Job 351, providing a detailed breakdown and comparison of results. The report also analyzes the usefulness of cost estimates for managerial decision-making.

Introduction

Job costing is a crucial accounting method used to track the costs associated with different projects or activities. It entails categorizing expenses into labor, materials, and overhead, enabling companies to manage projects efficiently and stay within budget.

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Accurate cost calculation is essential for pricing decisions, budgeting, and assessing the profitability of individual jobs or projects.

Methodology

Requirement 1: Traditional Plantwide Manufacturing Overhead Rate

Under the traditional costing approach, a single overhead rate is used to allocate overhead costs across all products based on a common allocation base. In this case, the allocation base is machine hours. The formula for calculating the plantwide overhead rate is as follows:

Plantwide Overhead Rate = Estimated Overhead Cost / Estimated Allocation Base

Using the provided data:

Estimated Overhead Cost	Estimated Allocation Base	Plantwide Overhead Rate
$570,000	15,000 machine hours	$38 per machine hour

Now, let's calculate the applied overhead cost for Job 351:

Applied Overhead Cost = Plantwide Overhead Rate × Actual Machine Hours

Given that the actual machine hours for Job 351 are 130:

Plantwide Overhead Rate	Actual Machine Hours	Applied Overhead Cost
$38 per machine hour	130 machine hours	$4,940

Now, let's calculate the total cost of Job 351:

Total Cost = Direct Materials + Direct Labor + Applied Overhead

Direct Materials	Direct Labor	Applied Overhead	Total Cost
$17,550	$2,000	$4,940	$24,490

Requirement 2: Activity-Based Costing (ABC)

Activity-Based Costing (ABC) is a more refined costing method that assigns overhead costs to specific activities and then allocates those costs to products based on their consumption of these activities.

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The process involves several steps:

Make a list of all activities required to complete the product.
Group activities into cost pools that capture the majority of costs associated with each activity.
Identify cost drivers (e.g., machine hours, change orders) for each cost pool.
Calculate the allocation rate for each cost driver by dividing the total estimated activity cost by the total estimated activity base.
Allocate overhead costs from each cost pool to products based on the actual consumption of cost drivers.

For Job 351, we have identified three cost pools and calculated their allocation rates:

Activity	Total Estimated Cost	Cost Driver	Allocation Rate
Machine Maintenance	$150,000	Machine Hours (MH)	$10 per MH
Engineering Change Orders	$160,000	Number of Change Orders	$40 per order
Waste Disposal	$260,000	Pounds of Hazardous Materials Generated	$260 per pound

Now, let's calculate the overhead costs for each activity based on the actual consumption for Job 351:

Activity	Actual Consumption	Allocated Overhead Cost
Machine Maintenance	130 MH	$1,300
Engineering Change Orders	9 orders	$360
Waste Disposal	40 pounds	$10,400

Now, let's calculate the total cost of Job 351 using ABC:

Direct Materials	Direct Labor	Allocated Overhead	Total Cost
$17,550	$2,000	$12,060	$31,610

Discussion

Comparing the two cost estimates:

Under traditional costing, the cost of Job 351 is $24,490, while under ABC, it is $31,610. The ABC method provides a more accurate cost estimate because it considers specific resources used by each product. This information is valuable for managerial decision-making.

Traditional costing relies on a single overhead rate for the entire production process, which can result in distortions when products have different resource consumption patterns. In contrast, ABC identifies the activities that drive costs and allocates them accordingly, providing a more granular and accurate view of costs.

Conclusion

In conclusion, the cost estimate based on Activity-Based Costing (ABC) rates provides more useful information for managerial decision-making. It offers a more accurate reflection of the actual costs incurred by Job 351, taking into account the specific activities and resources involved. Managers can use this information to make informed pricing decisions, improve cost control, and identify areas for cost reduction.

Recommendations

Given the benefits of ABC in providing precise cost allocation, it is recommended that the company consider implementing an ABC system for more accurate cost tracking and decision-making. This can help the company gain a competitive edge by pricing its products more competitively and efficiently managing resources.

Limitations

It is essential to acknowledge that implementing ABC can be resource-intensive and may require a significant initial investment in terms of time and software. However, the long-term benefits in terms of cost control and improved decision-making can outweigh the initial challenges.