How to classify overhead costs using either traditional or activity-based costing (ABC)

Overview

Companies choose their costing method based on their business activities and processes, as well as the products and services they offer. A company can be a manufacturing, merchandising, or service organization; this also impacts which costing method will be most useful for its purposes. As a part of costing, the company also needs to decide how to classify overhead costs using either traditional or activity-based costing (ABC).

In this written assignment, you will choose a company, consider its business and costing requirements, and recommend a costing system that will work best for the business.

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Prompt

Think about a company you know. This could be a current or past employer or a company you admire. Consider its business activities and the type of products and services offered. Based on what you have learned so far, write a short paper that reflects on the different costing methods and speculates on how they might apply to your selected company.

Specifically, you must address the following rubric criteria:

  • Company Overview: Identify the company you selected and provide a brief overview of its business.
    • Is it a manufacturing, merchandising, or service organization?
  • Costing Methods: Compare the job order and process costing methods, and explain how each of these can be applied to the company.
    • How could the costs differ if one method is chosen over the other?
  • Factory Overhead: Outline possible indirect or overhead costs the company may need to account for, and identify the type of costing the company might use for these costs.
    • If the company decides to use activity-based costing (ABC), what are some activity bases (cost drivers) it might use to allocate these costs?
  • Recommendation: Based on your analysis, recommend a costing method for the company, and explain why you think this method will work best for the business.

Guidelines for Submission

Submit your assignment as a 2- to 4-page Word document. Sources should be cited according to APA style.

Module Three Assignment Rubric

Criteria Exemplary Proficient Needs Improvement Not Evident Value
Company Overview N/A Identifies the company selected and provides a brief overview of its business, including specifying whether it is a manufacturing, merchandising, or service organization (100%) Shows progress toward proficiency, but with errors or omissions; areas for improvement may include providing a clear company overview and specifying the nature of the business (85%) Does not attempt criterion (0%) 10
Costing Methods Exceeds proficiency in an exceptionally clear, insightful, sophisticated, or creative manner (100%) Compares the job order and process costing methods; explains how each of these can be applied to the selected company; specifies how the costs would be affected in each method (85%) Shows progress toward proficiency, but with errors or omissions; areas for improvement may include adequately describing the two costing methods and how they can be applied to the company and specifying how the costs would differ if one method is chosen over the other (55%) Does not attempt criterion (0%) 30
Factory Overhead Outlines possible indirect or overhead costs the company may need to account for; identifies the type of costing the company might use for these costs; identifies more than one activity base the company may use if it chooses ABC to allocate overhead costs (100%) Outlines possible indirect or overhead costs the company may need to account for; identifies the type of costing the company might use for these costs; identifies at least one activity base the company may use if it chooses ABC to allocate overhead costs (85%) Shows progress toward proficiency, but with errors or omissions; areas for improvement may include listing relevant and plausible overhead costs for the selected business; identifying a costing method for allocating the overhead costs; and identifying correct activity bases for use with the ABC method (55%) Does not attempt criterion (0%) 30
Recommendation Exceeds proficiency in an exceptionally clear, insightful, sophisticated, or creative manner (100%) Recommends a costing method for the company; uses sound reasoning to explain why this method will work best for the business (85%) Shows progress toward proficiency, but with errors or omissions; areas for improvement may include using clear, sound reasoning to explain why the recommended costing method would work best (55%) Does not attempt criterion (0%) 20
Articulation of Response Exceeds proficiency in an exceptionally clear, insightful, sophisticated, or creative manner (100%) Clearly conveys meaning with correct grammar, sentence structure, and spelling, demonstrating an understanding of audience and purpose (85%) Shows progress toward proficiency, but with errors in grammar, sentence structure, and spelling, negatively impacting readability (55%) Submission has critical errors in grammar, sentence structure, and spelling, preventing understanding of ideas (0%) 5
Citations and Attributions Uses citations for ideas requiring attribution, with few or no minor errors (100%) Uses citations for ideas requiring attribution, with consistent minor errors (85%) Uses citations for ideas requiring attribution, with major errors (55%) Does not use citations for ideas requiring attribution (0%) 5
Total: 100%

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