August 24 2021

LO 4 1 Distinguish between Job Order Costing and Process Costing Managerial Accounting adapted by SPSCC

Process costing systems assign costs to each department as the costs are incurred. The costs to produce one unit are calculated, based on the information from the production department. Therefore, the focus of process costing systems is on measuring and assigning the conversion costs to the proper department in order to best determine the cost of individual units. Companies use different costing systems for determining the cost of custom products than they do for determining the cost of mass-produced products. When products are custom ordered, knowing the cost of the materials, labor, and overhead is critical to determining the sales price. As an easy example, think of a tailor who alters, repairs, and makes custom clothes for customers.

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Ultimately, implementing a well-selected costing system becomes a key strategic tool for optimizing resources, improving operational efficiency, and ensuring long-term sustainability in a dynamic and competitive business environment. Pet Smart, H&R Block, Chili’s, and Marshalls are popular chains often found at the same shopping center, even though they are very different businesses. Although they have a retail store, the Pet Smart Corporation also manufactures large volumes of its own products, whereas H&R Block prepares taxes for individual customers. Chili’s prepares food, and its wait staff provides a service, whereas Marshalls sells a variety of products at retail. ABC clothing for instance allocates the cost to lease its manufacturing facility based on the number of total clothing units produced. Plumbers or carpenters on the other hand have to allocate overhead cost for mileage driven to work for the clients.

Direct or Indirect Material

Accountants use control accounts to track the cost to go into the manufacturing process. Just as shown with job costing, Hannah has to create a budget with assumptions about costs. Mileage cost, for instance, will vary depending on the number of projects Jennifer completes in the distance between each job and the office.

Each department, or process, will have its own work-in-process inventory account, but there will only be one finished goods inventory account. The similarities between job order cost systems and process cost systems are the product costs of materials, labor, and overhead, which are used to determine the cost per unit and the inventory values. Prior to the sale of the product, separating production costs and assigning them to the product results in these costs remaining with the inventory. Until they are sold, the costs incurred are reflected in an assortment of inventory accounts, such as raw materials inventory, work in process inventory, and finished goods inventory. Understanding the role of matching engines in trading systems is equally important, as they ensure the efficient matching of buy and sell orders, directly impacting inventory management and asset pricing in financial markets.

compare and contrast job order and process costing systems

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Hannah also has to keep her staff accountable for using these systems every day because if they don’t, the company can’t track product costs. At this point, Hannah’s company needs to precisely track the material cost and labor costs that are needed to make a batch of shirts. The first money spent in a process costing system is for materials because you purchase the materials before you pay the workers to do something with the materials.

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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.
This decision impacts how you track expenses, manage profitability, and make strategic pricing decisions.
The organizational chart also shows the departments that report to the production department, illustrating the production arrangement.
It would be difficult, and not cost effective, to track the cost of each individual clothing item; rather, it is more efficient to track the costs in each phase of the clothing-making process.
After you’ve budgeted for both direct costs and overhead, you can create useful job estimates, using that budget and an added profit margin.

The first method is the weighted-average method, which includes all costs (costs incurred during the current period and costs incurred during the prior period and carried over to the current period). This method is often favored, because in the process cost production method there often is little product left at the end of the period and most has been transferred out. The second method is the first-in, first-out (FIFO) method, which calculates the unit costs based on the assumption that the first units sold come from the prior period’s work in process that was carried over into the current period and completed. The theory is similar to the FIFO inventory valuation process that you learned about in an earlier chapter. (Since the FIFO process costing method is more complicated than the weighted-average method, the FIFO method is typically covered in more advanced accounting courses.) We will focus on the weighted average method in this course. While the costing systems are different from each other, management uses the information provided to make similar managerial decisions, such as setting the sales price.

While companies may choose different cost accounting systems, each system must be capable of accumulating the costs incurred and allocating the costs to the product. Each costing system also requires the ability to obtain and analyze the cost data, and the more detailed the information needed, the higher the cost of collecting the data. The choice of cost accumulation system depends on the variety and type of products or services sold, or the type of manufacturing processes employed. The system used should be determined by weighing the cost of collecting the data and the benefit of having that information. Technology makes it easy to track costs as small as one fastener or ounce of glue. However, if each fastener had to be requisitioned and each ounce of glue recorded, the product would take longer to make and the direct labor cost would be higher.

Job order costing tracks prime costs to assign direct material and direct labor to individual products (jobs).Process costing also tracks prime costs to assign direct material and direct labor to each production department (batch). Manufacturing overhead is another cost of production, and it is applied to products (job order) or departments (process) based on an appropriate activity base. The management of each business relies on knowing each cost when making decisions, such as setting the sales price, planning production and staffing schedules, and ordering materials.

Choosing Between Process Costing and Job Order Costing

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The majority of companies produce more than one product, and they use process costing by making batches of identical products, or at least highly similar products.
Especially in the manufacturing sector, cost management becomes crucial to ensure the efficiency, profitability, and competitiveness of operations.
The second method is the first-in, first-out (FIFO) method, which calculates the unit costs based on the assumption that the first units sold come from the prior period’s work in process that was carried over into the current period and completed.

Process costing is the optimal costing system when a standardized process is used to manufacture identical products and the direct material, direct labor, and manufacturing overhead cannot be easily or economically traced to a specific unit. Each department or production process or batch process tracks its direct material and direct labor costs as well as the number of units in production. The actual cost to produce each unit through a process costing system varies, but the average result is an adequate determination of the cost for each manufactured unit.

Process costing is used when the products or services you offer are nearly identical or close to it. With the job costing approach, your business completes work on a project basis. While making drumsticks may sound simple, an immense amount of technology is involved.