Loadstar College of Management and Leadership

LEADSTAR COLLEGE OF MANAGEMENT AND LEADERSHIP

FACULTY OF BUSINESS AND LEADERSHIP
GRADUATE DEPARTMENT OF BUSINESS ADMINISTRATION

ADVANCED COST ACCOUNTING ASSIGNMENT

BY ABEBA KIROS YALLOW
ID NO. ______

FEB, 2018

HUMERA, ETHIOPIA

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Part I: Work Out

1. Advanced Exploration is a newly formed firm that conducts marine research in the Ethiopia
for contract customers. Organizationally, the firm is composed of two departments: Offshore
Operations and Lab Research. The Offshore Operations Department is responsible for gathering
test samples and drilling operations on the ocean floor. The Lab Research Department is
responsible for analysis of samples and other data gathered by Offshore Operations.
In its first month of operations (March 2001), Advanced Exploration obtained contracts for three
research projects:
Job 1: Drill, collect, and analyze samples from 10 sites for a major oil company.
Job 2: Collect and analyze samples for specific toxins off the coast of Louisiana for the U.S.
government.
Job 3: Evaluate 12 existing offshore wells for the presence of oil seepage for a major oil
company.
Advanced Exploration contracts with its customers on a cost-plus basis; that is, the price charged
is equal to costs plus a profit equal to 10 percent of costs. The firm uses a job order costing
system based on normal costs. Overhead is applied in the Offshore Operations Department at the
predetermined rate of $2,000 per hour of research vessel use (RVH). In the Lab Research
Department, overhead is applied at the predetermined rate of $45 per professional labor hour
(PLH). For March 2001, significant transactions are summarized here:
1. Materials and test components were purchased on account: $110,000.
2. Materials were requisitioned for use in the three research projects by the Offshore Operations
Department (all of these materials are regarded as direct): Job #1— $40,000; Job #2—$28,000;
and Job #3—$10,000. Materials were issued to the Lab Research Department: Job #1—$8,000;
Job #2—$6,000; and Job #3—$4,500.
3. The time sheets and payroll summaries indicated the following direct labor costs were
incurred
Offshore Operations Lab Research Job #1
$60,000 $56,000
Job #2 $50,00 $20,000
Job #3 $45,000 $16,000

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4. Indirect research costs were incurred in each department: O

Offshore OperationsLab Research
Labor $120,000 $10,000

Utilities/Fuel 290,000 5,000

Depreciation 330,000 80,000
5. Overhead was applied based on the predetermined overhead rates in effect in each
department. Offshore Operations had 360 RVHs (170 RVHs on Job #1; 90 RVHs on Job #2; and
100 RVHs on Job #3), and Lab Research worked 2,300 PLHs (1,400 PLHs on Job #1; 500 PLHs
on Job #2; and 400 PLHs on Job #3) for the year.
6. Job #1 was completed and cash was collected for the agreed-on price of cost plus 10 percent.
At the end of the month, Jobs #2 and #3 were only partially complete.
7. Any under applied or over applied overhead is assigned to Cost of Goods Sold. Required:
A. Record the journal entries for transactions 1 through 7.
Answer
1. Raw Material Inventory------------------------- 110,000
Account Payable------------------------ 110,000
2. WIP Inventory-Off Shore Operations (Job #1) ----- 40,000
WIP Inventory-Off Shore Operations (Job #2) ----- 28,000
WIP Inventory-Off Shore Operations (Job #3) ----- 10,000
Raw Material Inventory--------------------- 78,000
WIP Inventory-Lab Research (Job #1) ----- 8,000
WIP Inventory-Lab Research (Job #2) ----- 6,000
WIP Inventory-Lab Research (Job #3) ----- 4,500
Raw Material Inventory------------------- 18,500
3. WIP Inventory-Off Shore Operations (Job #1) ----- 60,000
WIP Inventory-Off Shore Operations (Job #2) ----- 50,000
WIP Inventory-Off Shore Operations (Job #3) ----- 45,000
Wages Payable ---------------------------- 155,000
WIP Inventory-Lab Research (Job #1) ----- 56,000
WIP Inventory-Lab Research (Job #1) ----- 20,000

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WIP Inventory-Lab Research (Job #1) ----- 16,000

Wages Payable ----------------------------- 92,000
4. Research Overhead-Off Shore Operations –74,000
Research Overhead-Off Shore Operations –95,000
Wages Payable -------------------------- 130,000
Utility/fuel Payable --------------------- 295,000
Accumulated Depreciation ----------- 410,000
5. WIP Inventory-Off Shore Operations (Job #1) ----- 340,000
WIP Inventory-Off Shore Operations (Job #2) ----- 180,000
WIP Inventory-Off Shore Operations (Job #3) ----- 200,000

Research Overhead-Off Shore Operations--------- 720,000

WIP Inventory-Lab Research (Job #1) ----- 63,000

WIP Inventory-Lab Research (Job #2) ----- 22,500
WIP Inventory-Lab Research (Job #3) ----- 18,000

Research Overhead-Lab Research-------------- 103,000

6. Finished Goods Inventory----------------------567,000

WIP Inventory-Off Shore Operations------------- 440,000
WIP Inventory-Lab Research -------------------- 127,000

Cash---------------------------------------- 623,000
Research Revenues------------------- 623,000
Cost of Goods Sold ---------------------- 567,700
Finished Goods Inventory------------ 567,700

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7. Cost of Goods sold --------------------------- 11,500

Research Overhead –Lab Research---------- 8,500
Research Overhead operations------------ 20,000

Job #1 Costs = 40,000+8,000+60,000+56,000+340,000+63,000=567,000

Job #1 Revenue= 567,000 * 1.1 = 623,700

B. As of the end of March 2001, determine the total cost assigned to Jobs #2 and #3.
Answer
Job #2Job #3
Direct Material offshore operations 28,000 10,000
Direct Labor offshore operations 50,0000 45,000
Research overhead offshore operations 180,000 200,000
Direct Material -Lab Research 6,000 4,500
Direct Labor -Lab Research 20,000 16,000
Research overhead -Lab Research 22,50018,000
Total 306,500293,500

2 Leadstar Travel Agency specializes in flights between Los Angeles and London. It books
passengers on United Airlines at $900 per round-trip ticket. Until last month, United paid
Leadstar a commission of 10% of the ticket price paid by each passenger. This commission was
Leadstar only source of revenues. Leadstar fixed costs are $14,000 per month (for salaries, rent,
and so on), and its variable costs are $20 per ticket purchased for a passenger. This $20 includes
a $15 per ticket delivery fee paid to Federal Express. (To keep the analysis simple, we assume
each round-trip ticket purchased is delivered in a separate package. Thus, the $15 delivery fee
applies to each ticket.) United Airlines has just announced a revised payment schedule for all
travel agents. It will now pay travel agents a 10% commission per ticket up to a maximum of
$50. Any ticket costing more than $500 generates only a $50 commission, regardless of the
ticket price.
1. Under the old 10% commission structure, how many round-trip tickets must Leadstar sell
each month(a) to break even and (b) to earn an operating income of $7,000?

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Answer

1. Leadstarreceives a 10% commission on each ticket:

10% * $900 = $90. Thus,

Selling price = $90 per ticket

Variable cost per unit = $20 per ticket

Contribution margin per unit = $90 - $20 = $70 per ticket

Fixed costs = $14,000 per month

A. Breakeven number Fixed costs $14,000 = 200 tickets

= =
of tickets Contribution margin per unit $70 per ticket

B. When target operating income $7,000 per month,

Answer

Quantity of tickets = Fixed costs + Target operating income

required to be sold Contribution margin per unit

= $14,000 + $7,000 = $21,000 = 300 tickets

$70 per ticket
$70 per ticket

2. How does United’s revised payment schedule affect your answers to (a) and (b) in
requirement 1?
Answer

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Under the new system, Loadstar would receive only $50 on the $900 ticket. Thus,

Selling price = $50 per ticket

Variable cost per unit = $20 per ticket

Contribution margin per unit = $50 - $20 = $30 per ticket

Fixed costs = $14,000 per month

a. Breakeven number = $14,000 = 467 tickets (rounded up)

of tickets $30 per ticket
Part II: Discussion Questions

1 Explain the deference between Job order cost accounting and Process Cost Accounting
There are various cost accounting techniques used to measure the cost of the product. When the
goods are produced only against special orders, job costing is used by firms. On the other hand,
when a product passes through several processes or stages, the output of one process becomes
the input of next process, and to determine the cost of each process, process costing method is
applied. It is generally used when like units are to be manufactured, that too in a continuous
flow.

In other words, the former is used to calculate the cost of jobs or contracts which are distinct in
nature, while the latter used to compute the cost charged to each process. So, here in this article
excerpt, we present all the differences between Job Costing and Process Costing, in a tabular
form.

Job Costing is A method of costing in which cost of each ‘job’ is determined is known as Job
Costing. Here job refers to a specific work or assignment or a contract where the work is
performed according to the customer’s instructions and requirements. The output of each job

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consists of normally one or less of units. In this method, each job is considered as a distinct
entity, for which cost is ascertained. Job Costing is applied when:

 The execution of the jobs is on the basis of client’s specification.

 All the jobs heterogeneous in many respects and each job require separate treatment.
 There is a difference in WIP (Work in progress), of each period.

Job Costing is best suited for the industries where specialized products are manufactured as per
customer needs and demands. Some examples of those industries are Furniture, Ship Building,
Printing Press, Interior Decoration, etc.
Process Costing is a costing technique, which is used to calculate the cost of each process is
known as Process Costing. Here process refers to a separate stage where production is performed
to convert the raw material into an another identifiable form. Process Costing is used in the
industry where identical products are produced in huge quantities.
In Process costing, the plant is divided into some processes where the production is performed
either sequentially, parallel or selectively. The output of the former process becomes the input of
the latter process, and at the end, the output of the last process is the final product. The individual
process account is prepared for each process.

Process Costing is best suited for large-scale production is done as well as where there are
multiple levels of producing a product. Some example of such industries is steel, soap, paper,
cold drink, paints, etc.
Key differences between job costing and process costing
The following are the major differences between job costing and process costing:

1. The costing method which is used for the ascertainment of the cost of each job is known as Job
Costing. Conversely, by process costing, we mean the costing technique used to determine the
cost of each process.
2. Job Costing is performed where the products produced of a specialized nature, whereas Process
Costing is used where standardized products are produced.
3. In Job Costing, the cost is calculated for each job, but in Process Costing first of all the cost of
each process is calculated which is then dispersed over the number of units produced.

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4. In job costing the cost center is the job itself while the process is the cost center in case of
process costing.
5. In job costing each job requires special treatment. On the other hand, no such special treatment is
required for each process in process costing.
6. There is no transfer of cost in job costing, from one job to another. However, the cost of the last
process is transferred to the next process in the process costing.
7. The possibility of cost reduction is very less in Job Costing. In contrast to Process Costing, the
scope of cost reduction is comparatively high.
8. In Job Costing, the cost is ascertained after the completion of the job, but in Process Costing, the
cost of each job is determined.
9. In job costing, losses are not bifurcated. On the contrary, in process costing normal losses are
ascertained carefully, while the abnormal losses are bifurcated.
10. In job costing, WIP may or may or may not be present at the end of the financial year. As against
this, WIP will always be present, irrespective of the quantity, in the beginning, or at the end of
the accounting period, in process costing.
Job Costing basically refers to the costs that are encountered in the businesses related to
manufacturing goods. Job Costing ledgers, wherein such costs are recorded, form an integral part
of the final account statement of the manufacturers. This type of costing involves recording the
costs as per the specific jobs rather than a particular process. However, Process Costing refers to
the methodology involved in calculating the costs that are incurred while performing a particular
task or undertaking a specific process. This might involve the costs that are either incurred
directly or indirectly.
Job Costing involves the costs of every individual unit of production. However, Process Costing
involves the costs that are averaged for each production unit. As per the definition, Process
Costing is a method that is applied to the manufacture business that is held together by various
continuous or repetitive processes. Process Costing works efficiently for the industries that are
known to produce a single type of product. Both of these terms signify the costs related to labor,
material and overhead costs.
Process Costing helps to keep a tight reign over the monthly expenditures in a manufacturing
business. As an example, Job Costing involves the costs that form salaries of labors working in a

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particular process whereas Process Costing involves the costs of the processed or manufactured
goods undertaken by different departments.
Job costing involves the detailed accumulation of production costs attributable to specific units
or groups of units. For example, the construction of a custom-designed piece of furniture would
be accounted for with a job costing system. The costs of all labor worked on that specific item of
furniture would be recorded on a time sheet and then compiled on a cost sheet for that job.
Similarly, any wood or other parts used in the construction of the furniture would be charged to
the production job linked to that piece of furniture. This information may then be used to bill the
customer for work performed and materials used, or to track the extent of the company's profits
on the production job associated with that specific item of furniture.
Process costing involves the accumulation of costs for lengthy production runs involving
products that are indistinguishable from each other. For example, the production of 100,000
gallons of gasoline would require that all oil used in the process, as well as all labor in the
refinery facility be accumulated into a cost account, and then divided by the number of units
produced to arrive at the cost per unit. Costs are likely to be accumulated at the department level,
and no lower within the organization.

Given these descriptions of job costing and process costing, we can arrive at the following
differences between the two costing methodologies:

 Uniqueness of product. Job costing is used for unique products, and process costing is
used for standardized products.
 Size of job. Job costing is used for very small production runs, and process costing is used
for large production runs.
 Record keeping. Much more record keeping is required for job costing, since time and
materials must be charged to specific jobs. Process costing aggregates costs, and so
requires less record keeping.
 Customer billing. Job costing is more likely to be used for billings to customers, since it
details the exact costs consumed by projects commissioned by customers.

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In situations where a company has a mixed production system that produces in large quantities
but then customizes the finished product prior to shipment, it is possible to use elements of both
the job costing and process costing systems, which is known as ahybrid system.
Job costing and process costing can be used in both manual and computerized accounting
environments.

Conclusion
There is no comparison between Job Costing and Process Costing because both the methods are
used in different industries. Although, the differences exist in the two methods.
One such difference is, each job requires a high degree of supervision and control, but the
process does not require so, as they are standardized in nature.
Two how can the implementation of a job order costing system help improve managerial
decision making?
Managerial skills are important in an organization and in leadership, especially managerial
decision making. These help achieve the goals of the organization and harness the potential of
everyone inside the organization. One important skill is managerial decision making. Leaders
should be decision makers and they become successful based on the decisions they make. It is
therefore necessary for a leader to know how and when to decide properly. However, not
everyone has the guts to decide for fear of failing. Some people would rather take orders from
their bosses so that if something goes wrong with the decisions they make, they cannot be
blamed. Research and analysis should be done prior to decision making. When everything is
thought of properly, the goals of the organization will not be a remote possibility. Anything is
possible with a careful and meticulous planning, willingness, communication, time management
and decision making.
Managerial Decision Making
Before a manager makes a decision, there should be a comprehensible strategy identified
containing the rules, regulations and directions. These rules will help everyone decide on a
matter quickly and rightfully. Decisions made are then reliable and unfailing all throughout.
Even the person occupying the smallest position in the organization will comprehend the choices
and judgments made by those belonging in top management. They will be inspired to contribute
to the process and development of the group. With a given strategy, managers will no longer

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have any fears or qualms in making decisions. A guide is all they need and with it, they will be
confident in dealing with issues of the company. They will no longer feel any discomfort in
taking risks as they can always say that the guide was wrong should their decision give a
negative turnout. Management courses that teach skills such as managerial decision making can
make or break an organization.
Importance of Managerial Decision Making

Managerial decision making is also critical for managers because a false move can ruin the
organization and the people in it in any time at all. It is therefore necessary for them to not decide
at a time when they cannot think straight or are emotionally stressed. As much as possible, they
should refrain from making impulsive decisions as these may be wrong and mistakes will follow.
Wrong decisions mean failure to achieve company goals. Failure to achieve company goals
means wasted resources such as money, company bills, manpower and time. No amount of
proper time management strategies can save wasted time. Wrong decisions can be avoided if the
facts are complete, analysis has been made and more people get involved to give their opinions
on the matter.

Strategic for Managerial Decision Making

Managers should also familiarize themselves with the two decision making strategies recognized
in the field of management. These are the “Plus-Minus-Interesting” and the cost-benefit
methods. These strategies involve weighing the advantages and disadvantages and they have
measurable data in their hands before coming up with a decision. With such guide, it will be easy
for managers to make a choice. Decision making is one of the most vital managerial skills
because it involves the final execution of a well-thought of plan. With managerial skills such as
sound managerial decision making, a manager will assist the company in achieving its goals and
objectives.

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Bibliography

 www.wyzant.com

 www.acadamia.edu

 www.managementstudyguide.com

 www.accountingexplained.com

 www.dummies.com

 www.accountingcoach.com

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