Accounting;Bennett Body
Accounting;Bennett Body
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This case focuses on the difference between a business that produces a standard good (and uses standard costing) and on that produces custom goods and uses job costing. Although numbers are included in this case, they are their to help illustrate the effect of changing the system.Your options for this case are:
•Keep the existing system
•Change to a standard costing system
•Use a hybrid form of costing that utilizes both standard and job costing features.
There are many correct answers to this case; however, all involve giving specific examples to justify which accounting method you prefer.
SAMPLE ANSWER
Bennett Body Company
In the accounting literature, cost accumulation methods and inventory valuation methods are often called cost accounting systems. Even so, these techniques are just elements of a system or subsystem (Kaplan, 2011). Basing on the provided case, this paper describes the most appropriate accounting system for Bennett Body Company. The paper highlights that the hybrid system is the most suitable.
The most appropriate option for Bennett Body Company entails the use of a hybrid form of costing in which both job costing and standard costing features are employed. A hybrid costing system is particularly important when the manufacturing company handles batches of products in lots and charges the cost of materials to those lots, similar to how it occurs in a job costing environment, whilst increasing overhead and labour costs at the work centre or departmental level and assigning these costs at the individual unit level, similar to how it occurs in a process costing environment (Jinga et al., 2010).
In essence, hybrid costing system is often utilized in situations in which there is identical processing of a baseline product, and individual modifications which are made beyond baseline processing level. Nita (2014) pointed out that hybrid systems are employed in cases in which more than a single method of cost accumulation is needed. In some situations, for instance, standard costing method is utilized for direct materials whereas job costing technique is employed for conversion costs, that is, factory overhead and direct labour. In some other situations, job costing method may be employed for direct materials whereas standard costing method is utilized for conversion costs (Kaplan, 2011). The different operations or departments in the company may necessitate dissimilar methods of cost accumulation. As such, hybrid cost accumulation techniques are at times called operational costing methods.
Hybrid costing system is appropriate for Bennett Body Company since the company manufactures custom truck bodies and some customers would at times re-order the exact duplicate of a truck body that was ordered previously, although some modifications cause changes in design and therefore in cost. Hybrid costing system is also relevant for Bennett Body Company since the company manufactures identical products, that is truck bodies, until they get to a particular stage in which some modifications are made in order to make the truck body custom. Basically, manufacturing each of the truck bodies requires the same processing, although different amounts of material. The company can utilize a job costing system in assigning differing quantities of materials to each truck body, whilst employing the standard costing method in allocating the cost of overhead and labour equally across each of the truck bodies produced (Nita, 2014).
A hybrid of job costing and standard costing is useful in situations in which there is a common production process which applies to several batches but where the materials content varies from one batch to another one. Having a hybrid accounting system is better than having either a strict job costing system or a strict standard costing system. A standard costing system is essentially a predetermined estimate of what it should cost or is anticipated to cost to produce a single unit of a given product (Kaplan, 2011). With the hybrid system, standard costing and job costing would be employed. With standard costing, every production cost would be applied or charged to the inventory with the use of predetermined or standard prices, and quantities. The differences between the actual costs and applied costs would be charged to variance accounts. The variances basically offer the foundation for the notion of accounting control. With job costing, the costs would be accumulated by lots, contracts, orders or jobs. The main thing is that the work would be carried out in accordance with the requirements of the client. Therefore, every job may be inclined to be different (Sandretto, 2012).
It is worth mentioning that the main issue in selecting to utilize a hybrid accounting system is whether some elements of the manufacturing process are more easily accounted for under a dissimilar system than the system which is utilized by the majority of the production operation (Jinga et al., 2010). A lot of business organizations are actually not aware that they are utilizing a hybrid costing system – in essence, they have just adapted their cost accounting systems to their business model’s operational requirements. When employing a hybrid cost accounting system, a consideration is the added cost of employing 2 dissimilar cost tracking systems instead of just one cost tracking concept for all operations. Nita (2014) reported that a hybrid system should only be utilized if the resultant information is very different from what would have been obtained from making use of a single costing system.
Conclusion
In conclusion, Bennett Body Company should employ a hybrid of job costing system and standard costing system. Therefore, the accounting system will have features of both job costing system and standard costing system. Hybrid costing system is relevant for Bennett Body Company given that the firm manufactures identical products – truck bodies – until they get to a particular stage in which some changes are made so as to make the truck body custom-made to the customer.
References
Jinga, G., Dumitru, M., Dumitrana, M., & Vulpoi, M. (2010). Accounting systems for cost management used in the Romanian economic entities. Accounting & Management Information Systems / Contabilitate Si Informatica De Gestiune, 9(2), 242-267.
Kaplan, R. S. (2011). Accounting Lag: The Obsolescence of Cost Accounting Systems. California Management Review, 28(2), 174-199.
Nita, C. G. (2014). Management accounting and control systems. Management Intercultural, 16(2), 257-262.
Sandretto, M. J. (2012). What kind of cost system do you need?. Harvard Business Review, 63(1), 110-118.
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