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5 1 Compare and Contrast Job Order Costing and Process Costing Principles of Accounting, Volume 2: Managerial Accounting

To implement her process costing system, she computes the cost per specific unit produced. Each type of product produced will have a slightly different cost total. The difference between the traditional method (using one cost driver) and the ABC method (using multiple cost drivers) is more complex than simply the number of cost drivers. When direct labor is a large portion of the product cost, the overhead costs tend to be consistently driven by one cost driver, which is typically direct labor or machine hours; the traditional method appropriately allocates those costs. When technology is a large portion of the product cost, the overhead costs tend to be driven by multiple drivers, so using multiple cost drivers in the ABC method allows for a more precise allocation of overhead.

When products have gone through all three stages ofproduction, they are shipped to a warehouse, and the costs areentered into finished goods inventory. Once products are deliveredto retail stores, product costs are transferred from finished goodsinventory to cost of goods sold. Much more record keeping is required for job costing, compare and contrast job order and process costing systems. since time and materials must be charged to specific jobs. The record keeping in both cases is essential, since a customer’s auditors may want to examine it to prove that the cost-based prices billed to the customer are reasonable. Job costing is used for unique products, and process costing is used for standardized products.

  1. Textbook content produced by OpenStax is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike License .
  2. The costs to produce one unit are calculated, based on the information from the production department.
  3. Understanding the full manufacturing process for a product helps with tracking costs.

It is used when goods are made to order or when individual costs are easy to trace to individual jobs, assuming that the additional information provides value. In these circumstances, the individual costs are easy to trace to the individual jobs. Process costing and job order costing are both acceptable methods for tracking costs and production levels. Some companies use a single method, while some companies use both, which creates a hybrid costing system. The system a company uses depends on the nature of the product the company manufactures.

Managerial Accounting

Each time, Sandy would repeat the scheme, pairing his fraudulent check with one that appeared legitimate. Someone would have to closely examine the checks to see any discrepancies, and that seemed unlikely.” The multimillion dollar fraud was exposed when another accountant looked closely at the checks and noticed discrepancies. When a batch of shirts is finished, the total cost to move from work in process inventory to finished goods inventory, which indicates the products are ready for sale. Making the masks is a process that requires material and labor, and costs are incurred as the product moves through production and from one department to another. The fabric is cut into the correct shape, then each mask is sewn, and then the masks are packaged for shipment. Rock City Percussion makes 8,000 hickory sticks per day, four days each week.

What’s important is that every overhead cost is allocated with the same process and the costs have to be included in each job estimate. One advantage of the ABC system is that it provides more accurate information on the costs to manufacture products, but it does not show up on the financial statements. Explain how this costing information has value if it does not appear on the financial statements. A grocery store’s analysis of a recent customer survey finds an increasing number of customers interested in being able to custom-order meals to go.

Even two sticks made sequentially may have different weights because the wood varies in density. Job order costing systems assign costs directly to the product by assigning direct materials and direct labor to the work in process (WIP) inventory. As you learned previously, direct materials are the components that can be directly traced to the products produced, whereas direct labor is the labor cost that can be directly traced to the products produced. Regardless of the costing method used (job order costing, process costing, or another method), manufacturing companies are generally similar in their organizational structure and have a similar flow of goods through production.

Organization of Flow of Goods through Production

We saved more than $1 million on our spend in the first year and just recently identified an opportunity to save about $10,000 every month on recurring expenses with Planergy. Hannah owns ABC Clothing, a company that makes apparel for sports and outdoor activities. Their cotton shirts made with extra layers of fabric and reinforce stitching to prevent tearing but also help wick away moisture. The Coca-Cola Company is one of the world’slargest producers of nonalcoholic beverages.

There are often challenges that begin with convincing employees that it will provide benefits and that they should buy into the new system. See this 1995 article, Tapping the Full Potential of ABC, illustrating some of Chrysler’s challenges to learn more. Job costing is more likely to be used for billings to customers, since it details the exact costs consumed by projects commissioned by customers.

What is Job Costing?

Each department, or process, will have its own work in process inventory account, but there will only be one finished goods inventory account. Each department, or process, will have its own work-in-process inventory account, but there will only be one finished goods inventory account. Job costing, also known as job order costing, and process costing are cost accounting systems designed to help businesses keep track of all the costs they have to pay to produce a product or deliver a service.

Examples of products manufactured using the job order costing method include tax returns or audits conducted by a public accounting firm, custom furniture, or, in a comprehensive example, semitrucks. At the Peterbilt factory in Denton, Texas, the company can build over 100,000 unique versions of their semitrucks without making the same truck twice. At the Peterbilt factory in Denton, Texas, the company can build over \(100,000\) unique versions of their semitrucks without making the same truck twice.

1 Process Costing Vs. Job Order Costing

If you manufacture face masks, you can calculate the amount of each fabric (raw materials) you use in each mask for direct materials and the direct labor costs it takes to run the machines. Can you imagine having to determine the cost of making just ONE lego when we can make 1.7 million legos per hour? Accountants compute the cost per unit by first accumulating costs for the entire period (usually a month) for each process or department. Second, they divide the accumulated costs by the number of units produced (tons, pounds, gallons, or feet) in that process or department. Prior to the sale of the product, separating production costs and assigning them to the product results in these costs remaining with the inventory.

They also need to know the costs to determine when a new product should be added or an old product removed from production. What would happen, if down the line, they decide to do special custom planners for different customers? For example, an order comes in to make a planner in a certain color for a large employer to give to all employees. This may create a “job-order costing” situation, rather than a “process costing” situation. But for right now, they are only creating one product in their facility and they are producing it all the time—let’s move forward with process costing. Before you can set up an effective job or processing costing system, you have to separate direct costs from indirect, or overhead costs.


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