paper_paper_paper_250B - Analysis of Traditional Job...

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Analysis of Traditional Job Costing and Activity-Based Costing (ABC) The current single cost-driver system apportions all non-job related costs into a single overhead pool. This overhead is allocated to Assurance and Audit, Tax services, and Valuation and Financial areas proportional to the direct labor dollars charged to that particular service area. Unfortunately, this system is inefficient because it does not divide the exclusive additional non-job related costs into their specific services. The proposed activity-based costing system proves to be more efficient because it separates all non-job related costs into different overhead pools with corresponding cost-drivers, which ultimately distribute overhead costs specifically to their cost driving activities. In the case of the OMICRON company, the current single cost-driver and activity-based costing methods produced slightly different average costs per job. Two out of the three average costs per job were lower with the proposed activity-based costing system, most likely because direct labor dollars as the only allocation base may not be the best way to derive the averages. With direct labor dollars as the single driver, costs will be inflated or deflated by large margins leading to misinterpretations when analyzing whether or not to bid on potential jobs. For example, using the current single allocation method, Assurance and Audit as well as Tax services are heavy in labor hours and can mislead management to believe that non-job related costs for these services are more costly than in actuality. Although the two methods resulted in only a few thousand difference for each of the average cost per job, the proposed activity-based costing system better allocates those costs in order to help OMICRON better price their services, so they can be more competitive in the market.
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