Muddled, who
is enrolled in ACFI2003, is having trouble understanding the concepts underpinning
Question 1 of the Major Assignment.
Muddled
says: "I’m confused. I understood
the first lecture and thought this course would be a walk in the park but now I
am freaking out as new terms are being introduced in every lecture topic.
The loaf
of bread example that was used in the first lecture was easy to understand: we
costed the loaf of bread by tracing direct materials and direct labour to the
loaf and then applied the remaining costs as overhead. I could see from the diagram showing
T-accounts how materials, labour and overhead are utilised in the production of
bread, and how they were transformed into WIP and finished goods.
But
Question 1 does not fit the template I have developed for the loaf of bread
example. For a start, Question 1's information
on the combining process provides data on WIP, units completed and transferred
out. It also has material, labour and
overhead being added to production at different times. I understand that. But I cannot, for the life of me, figure out
what 'equivalent units' are, and why they are necessary. Why is Question 1 so much more complicated
than the bakery example?
I decided
to memorise the calculation for equivalent units as I had given up trying to
understand what it meant. The
calculation involves manipulating the 'physical flow of units of
production'. I do not understand the
difference between the 'physical flow' and 'equivalent units.'
I could
get the gist of job costing – for instance, in a construction site, you have
different contracts that have been undertaken, and all I have to do is to trace
direct materials and direct labour to each contract, and apply overhead to each
contract. Why is the manufacture of
herbicides (in Question 1) not costed in the same way?
While I
was struggling with job and process costing, the course introduces actual and
normal costing. I get actual costing,
but do we need normal costing in an organisation? I think it just complicates matters by
jumbling up actual and estimated figures. I think organisations provide
management with stewardship accounts that are based on objective verifiable
evidence."
Required (The rubric on page 5 will
be used to mark this question):
ACFI 2003
is based on the following fundamental costing principle: cost-management systems
should reflect the fact that different costs are relevant for different
purposes. It means that the design of a
costing system should represent the unique characteristics of the production
process. Muddled does not
"get" this; it is far too abstract for him.
You are asked
to help Muddled by explaining how this fundamental costing principle affects
the way in which job and process costing systems are designed/constructed. Write an essay which compares job and process
costing systems. Your essay should be in
plain English. Your essay must
be broken down into the following subheadings (2.1) to (2.4) below:
2.1) Your
essay should explain the axiom, "different costs are relevant for
different purposes" by briefly describing the process and job costing systems,
and explaining the production context in which each system produces relevant
and useful information for management.
2.2) In
explaining the axiom above, you are required to explain the following
differences between job and process costing systems:
2.2.i) The cost object for job costing is a
contract, but the cost object for process costing is the process (or
department). Explain the rationale for choosing these different cost objects for
each system.
2.2.ii) How are costs accumulated under each costing
system?
2.3) Then explain the following costing concepts
that are found in process costing: 'equivalent units' and 'transferred in
costs.' Why are these concepts not used
in job costing?
2.4) Lastly,
describe actual and normal cost-management systems. The indirect nature of overhead costs makes
them difficult to control. Which system better
enables management to control overhead costs? Explain.