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Comparing Costing System for Inventory Costing and Income Determination: The Hakaluki Manufacturing Company has entered in producing items to fill specific orders received from its customers. While at any given point of time it may have substantial inventories of work-in process and finished goods, all such amounts are assignable to company's sales orders which it has received.
The company's operations, including the administrative and sales activities, are completely departmentalized. Its costing system is on a job-order basis. Direct materials and direct labour are identified with jobs by the use of materials issue tickets and daily time cards. Overhead costs are accumulated for each factory service, administrative, and marketing department. These indirect overhead costs, including administrative and marketing expenses, are then allocated to producing departments and an overhead rate computed for each producing department.
This rate is used to apply overhead to jobs on the basis of direct labour hours. The result is that all costs and expenses incurred during any month are charged to the work in process accounts for the jobs.
Required: (1) Comparison of this system, as it affects inventory costing, with the usual system for manufacturing businesses.
(2) Criticism of the system as it affects inventory costing and income determination.
(3) Justifications for the use of the company's system.
