ACC 202 Module 3 Costing Methods Assignment example

Two Kinds of Candle, Three Ways to Cost Them: Process, Job Order and Activity-Based Costing at a Composite Candle Maker

[Student Name]

Southern New Hampshire University

ACC 202: Managerial Accounting

Module Three Assignment

[Instructor Name]

[Date]

The organization, setting and figures below are a composite written as a model document. No real employer, client, colleague or patient is described.

Two Kinds of Candle, Three Ways to Cost Them: Process, Job Order and Activity-Based Costing at a Composite Candle Maker

Two Kinds of Production in One Workshop

Cedarline Candle Co., the composite candle maker used throughout this course project, produces two kinds of output. Most of its volume is standard candles in eight scents, poured in large batches that move through the same steps: melting wax, blending fragrance, pouring into jars, curing for a week and labeling. The candles in each scent line are identical, and production runs continuously. A smaller but growing share of its business is custom corporate orders, such as candles with a client's logo etched on the jar and a signature scent, made once to a customer's specification. Choosing the right costing method depends on which kind of production is being costed (Franklin et al., 2019).

Process Costing for the Scent Lines

Because standard candles are identical and produced continuously, tracing costs to individual candles would be pointless. Process costing instead accumulates costs by department for a period and averages them over the units produced. The complication is that at month end some candles are only partly finished, so costs must be divided between completed units and work in process using equivalent units.

In the pouring department in September 2025, Cedarline began with 200 candles in process, complete as to materials and 40 percent complete as to conversion costs. It started 2,000 candles, completed and transferred 1,950 to curing, and ended with 250 candles complete as to materials and 60 percent complete as to conversion. Using the weighted-average method, equivalent units for materials are the 1,950 completed plus 250 in process, or 2,200. Equivalent units for conversion are 1,950 plus 60 percent of 250, or 2,100. Materials costs, 1,760 dollars from beginning inventory plus 19,580 dollars added, total 21,340 dollars, or 9.70 dollars per equivalent unit. Conversion costs of 520 plus 6,620 dollars total 7,140 dollars, or 3.40 dollars per equivalent unit.

The 1,950 candles transferred out therefore cost 13.10 dollars each, or 25,545 dollars, and ending work in process is 250 times 9.70 dollars plus 150 times 3.40 dollars, or 2,935 dollars. Together these equal the 28,480 dollars of cost to account for, which confirms the calculation.

Job Order Costing for a Custom Order

Custom orders are different: each is unique, and the customer is quoted a price in advance, so Cedarline needs to know what that specific order costs. Job order costing traces direct materials and direct labor to each job on a job cost sheet and applies overhead using a predetermined rate. In October, a regional bank ordered 300 candles with its logo etched on the jar, priced at 19 dollars each. Direct materials were 12.25 dollars a candle, including a custom etched jar at 6.20 dollars, for 3,675 dollars. Direct labor at the piece rate was 540 dollars. Cedarline applies overhead at 1.60 dollars per candle, the rate it uses for all production, adding 480 dollars. The job cost sheet shows a total of 4,695 dollars, or 15.65 dollars a candle, and a margin of 3.35 dollars a candle.

Why Not One Method for Everything?

It might seem simpler to cost every candle the same way, but each method would fail on the other kind of work. Job order costing applied to the scent lines would require opening a job cost sheet for every batch of lavender or cedar candles and tracing wax, jars and labor to each, producing thousands of records that all say roughly the same thing. The extra detail would cost staff time and tell the owner nothing that the department average does not. Process costing applied to custom orders would do the opposite damage: it would average the bank's etched jars and signature scent together with ordinary candles, hiding the fact that a custom candle uses a jar costing more than twice as much and takes design time a standard candle never needs. The owner would then quote custom work at an average cost and underprice it. Many manufacturers therefore run hybrid systems, costing continuous production by process and distinct orders by job, and Cedarline's production is a clear case for that approach. The choice of method is not a matter of accounting preference but of matching the cost system to how the product is actually made and sold.

What Activity-Based Costing Reveals

A single overhead rate per candle assumes every candle uses overhead equally. Custom orders do not. They require design work, separate setups to clean the melting stations and change fragrances, and hand inspection of etched jars, while a standard scent run requires almost none of these per candle. Activity-based costing assigns overhead through the activities that actually consume it (Kaplan & Anderson, 2004). Cedarline's overhead analysis supports three rates: 120 dollars per setup, 45 dollars per design hour and 0.35 dollars per candle for special packing and inspection. The bank order required three setups, ten design hours and packing for 300 candles, so its activity-based overhead is 360 plus 450 plus 105 dollars, or 915 dollars, nearly twice the 480 dollars the single rate assigned.

Table 1

Cost of the 300-Candle Custom Order Under Two Overhead Methods

Note. Composite figures.

Table 1 compares the two results.

Recommendation

Cedarline should use process costing for its standard scent lines and job order costing for custom orders, and it should apply overhead to custom orders using activity-based rates. The comparison shows why the last point matters. Under the single rate, custom orders appear to earn 3.35 dollars a candle; with their actual use of setups, design and inspection recognized, they earn 1.90 dollars. A uniform overhead rate quietly shifts the cost of custom work onto standard candles, making the custom business look better and the core business look worse than they are. Cedarline is still profitable on the bank order, but at a thinner margin than the owner believed, and future custom quotes should add a setup and design charge or set a minimum order size. Activity-based costing costs more to maintain than a single rate, but for a business whose custom work is growing, the information is worth it (Datar & Rajan, 2021).

References

Datar, S. M., & Rajan, M. V. (2021). Horngren's cost accounting: A managerial emphasis (17th ed.). Pearson.

Franklin, M., Graybeal, P., & Cooper, D. (2019). Principles of accounting, volume 2: Managerial accounting. OpenStax. https://openstax.org/details/books/principles-managerial-accounting

Kaplan, R. S., & Anderson, S. R. (2004). Time-driven activity-based costing. Harvard Business Review, 82(11), 131-138.