DERRICK COMPANY

A Business Case
Presented to the
Accountancy Department
De La Salle University - Manila
Term 1, A.Y. 2017-2018

In partial fulfillment
Of the course requirements
In ACTBAS4 Section K31

SUBMITTED TO:

SUBMITTED BY:

December 7, 2017
I. INTRODUCTION
Cost accounting involves the accumulation and allocation of costs through
various methods. It is essential to the management of a company as it greatly aids
in decision-making. Budgeting especially is an important tool in cost accounting that
must be mastered by companies if they seek to increase their profit margins as
much as possible. While financial accounting assists potential investors, cost
accounting is concerned with the internal operations of a business, more specifically
how operations can be better controlled and improved.
This business case aims to analyze the activities of Omega Engineers for the
month of September using the job order costing system. The job order costing
system is to be defined and its use in certain manufacturing companies is to be
justified. Its particular advantages and disadvantages are also to be discussed.
Conclusions to be drawn are also to serve as a guide for future better management
of Omega Engineers and as such, the overall document should serve as an
application of the concepts learned throughout the duration of the course

II. DISCUSSION
There are two main cost accounting systems namely, job order costing and
process costing. In a job order costing system, each product is called a job. Direct
costs are traced whereas indirect costs are allocated or applied. It is appropriate for
a company to use a job order costing system when its business is focused on
differentiated or unique products or services. The system of accumulating costs for
certain jobs are ideal for determining selling prices. In cases wherein jobs are done
according to contracts with set prices, profit and loss is easily monitored through a
comparison of the actual cost with the contract price. The process of allocating or
applying manufacturing overhead costs and examining it alongside the actual costs
incurred at the end of the period allows managers of a certain business to create
more accurate projections for similar job productions for the next incoming periods.
On the other hand, process costing would be more suitable for mass production of
similar goods.
 The main challenge of implementing a job order costing system is the fact that
the manufacturing overhead costs are based on estimated figures as job order
costing entails the allocation of overhead costs based on an allocation base in order
to determine a budgeted manufacturing overhead rate. This is because actual costs
are still unknown at the beginning of a period. This may be considered less reliable
especially since there is always the risk of a poorly selected allocation base. This
challenge however may be overcome by not only proper examining and analyzing
past overheads but also by monitoring trends in the market in order to estimate
prices already adjusted for inflation.
While the record of transactions in a manufacturing system has many similarities
with that of a service or merchandising company, a manufacturing system makes
use of three inventory accounts: Materials, Work in Process, and Finished Goods. A
merchandising company on the other hand only has one such account which is
Merchandise Inventory whereas a service company has none. Similar to a
merchandising company, a manufacturing system may also make use of either
periodic or perpetual inventory method.
As seen in the attached papers containing the journalized transactions and the
ledgers, there is an underapplied overhead of Php. 343,275.00. Managers should
dispose of underapplied/overapplied manufacturing overhead costs at the end of the
year by transferring the difference between the actual manufacturing overhead costs
incurred and the applied manufacturing overhead costs to cost of goods sold by
debiting it when the overhead is underapplied and crediting it when overhead is
overapplied.

III. CONCLUSION/RECOMMENDATION
For the month of September, Omega Engineers incurred much more costs than
estimated. This underapplied overhead is also considered an “unfavorable variance”
due to the fact that this would increase the cost of goods sold for the product and
lower overall profit. I would recommend that management for Omega Engineers
reevaluate their cost allocating system and select a cost-allocation base that would
yield more accurate estimates in order to minimize additional costs and maximize
profit in the future.
IV. REFERENCES

Horngren, C.T., Datar, S.M., & Rajan, M. (2014). Cost Accounting: A Managerial
Emphasis (15th ed.). Pearson Education Limited.

Vanderbeck, E.J., & Mitchell, M.R. (2016). Principles of Cost Accounting (17th
ed.). Mason, OH: South-Western Cengage Learning Asia PTE Ltd.