Case 19-1
Bennett Body Company

1. In response to the email of Paul Bennett:

The Bennett system has a higher cost of paperwork because we are using the Job Order Costing and the Conley System uses process costing. Conley Corporation uses Process costing in accumulating cost of production. We are costing products based on per job order bases. Conley is costing their production on a per department basis because it has standard model design. Our products are based on costumer's specification, and therefore each product is unique. Process costing can not be used under our present set-up.
Possible reasons for cost differences between actual and standard costs under Conley's system:

a. Materials Price and Usage Differences b. Labor Rate Differences c. Labor Efficiency Difference d. Production Volume Difference

Standard costs are usually developed from previous year's experiences and some adjustments from each department's managers. If our product's sales volume is seasonal in nature, it would be better to have our overhead allocation rate change to monthly from annually. If not, we could stick to annual overhead rate for simplicity of computation.
Under our present production, it is preferable to stick with Job Order costing, unless we change our products to a more standard design (no customer specifications), and Process costing will not work under our system.

2. Since Bennett main operation concentrates on manufacturing customized trucks, they could still maintain using its job costing. This is because each model that they produce may not be applicable for future demands and they occasionally receive orders that require changes on previous model. But, in order for them to improve its costing system, perhaps they should incorporate standard job costing. This would greatly reduce their recordkeeping and paperwork costs and gives the management a proper measure of performance, since they can compare the actual cost of production against the standard cost that has been established. Standard job costing allows the incorporation of variances, and this would make a better measure for operation control, as the management may be able to make thorough investigation into the operation of the company. Besides that, the management could also prepare estimates of the production costs for the purpose of future planning.
Bennett could also incorporate a mixture of costing standard, between process and job costing. Some parts of the custom trucks that they produced may have the same size and shape and thus are standard across all models. For instance, the tyres and the side and rear mirrors could have the standard size and shape. In measuring the production of these standard parts, perhaps they could adopt the standard process cost. This would greatly improve their current cost system and provide a means for the management to better estimates the production cost. Besides that, Bennett should also benchmark against other custom manufacturers, as this will give a true reflection of the performance of the company.
With the advent of technology, perhaps the use of IT system could eliminate some of the manual operations that have been used to keep record of the actual production costs. The usage of IT system for costing could greatly enhance the process of keeping track of the records and helps the management to get statistics in a timely manner, thus leads to better decision making as well as more effective operations.
The Bennett costing system is based on the absorption costing compared to the Conley cost system where it is based on the variable costing. As such, Bennett included the fixed overhead cost into the calculation of product cost. With regard to the variable overhead costs, perhaps Bennett should consider external factors that may affect the overall overhead costs. Factors such as minimal standard wages might affect the efficiency variance. If the standard wages that is used not applicable to the current economic situation, the employees may not perform up to the maximum capacity, thus contribute to reducing the efficiency rate. With respect to the fixed overhead cost, factor such as the price of diesel, which is beyond the control of the company may also affect the budgeted fixed overhead. A sudden rise in price may increase the cost of operating the machines, thus resulting in higher variance in capacity.