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

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Although these systems have marked differences, they are also
similar in many ways. These three inventory accounts are used
to record product cost information for both process costing and job
costing systems. However, several work-in-process inventory
accounts are typically used in a process costing system to track
the flow of product costs through each production department. There are two methods used to compute the values in the work in process and finished goods inventories. 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).

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. This is crucial to generate job estimates https://accounting-services.net/ that are as close to your actual cost as possible. Job Costing is best suited for the industries where specialized products are manufactured as per customer needs and demands. Some examples of those industries are Furniture, Ship Building, Printing Press, Interior Decoration, etc.

  1. Although these systems have marked differences, they are also
    similar in many ways.
  2. Wood and fastener metals are typically added at the beginning of the process and are easily tracked as direct material.
  3. The Ultimate Planner is a printed planner designed to make every small business owner’s life just a bit easier.

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. Although job order costing measures the cost of each individual compare and contrast job-order and process costing systems job, process costing measures the cost of work actually done on WIP during a period. In contrast, period costs are not directly related to the production process and are expensed during the period in which they are incurred. This approach matches administrative and other expenses shown on the income statement in the same period in which the company earns income.

2: Comparison of Job Costing with Process Costing

As an example, consider a construction contractor using a job order costing system. The contractor has to keep track of all the wood, nails, screws, electrical fixtures, paint and other materials used on the job, as well as tracking workers’ lunch breaks and hours worked. Work in process begins with the first stage of production
(mixing and blending), continues with the second stage (bottling),
and ends with the third stage (inspecting, labeling, and
packaging). When products have gone through all three stages of
production, they are shipped to a warehouse, and the costs are
entered into finished goods inventory.

ABC Clothing then assigns overhead to each product and the process of allocating overhead is the same as in job costing. After Hannah determines her overhead costs and decides on activity level she allocates those costs for each unit. Since there are eight slices per pizza, the leftover pizza would be considered two full equivalent units of pizzas. The equivalent unit is determined separately for direct materials and for conversion costs as part of the computation of the per-unit cost for both material and conversion costs.

What Kind of Businesses Can Use Job Costing?

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. For example, in a job order cost system, each job is unique, which allows management to establish individual prices for individual projects. Both process costing and job order costing maintain the costs of direct material, direct labor, and manufacturing overhead. A process costing system is used by
companies that produce similar or identical units of product in
batches employing a consistent process. Process
costing systems track costs by processing department, whereas job
costing systems track costs by job.

Importance of Job Order Costing:

Process costing is the optimal system to use when the production process is continuous and when it is difficult to trace a particular input cost to an individual product. 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.

This is the case for plumbers, mechanics, freelancers, movers, and anyone who works in a trade or provides customers an estimate before doing any work. A job order costing system can help you gain control over your financial assets such as invoices, material costs, payroll, etc. It helps your accountant to calculate the data or track any important information using those assets.

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. Job order costing is an accounting system that traces the individual costs directly to a final job or service, instead of to the production department. Even retail companies need to know the cost of the purchased products before the sales price is set.

First, companies producing individual, unique products, known as jobs, use job costing (also called job order costing). Companies such as construction companies and consulting firms produce jobs and use job costing. Figure 4.1 shows how product costs flow through accounts for job
costing and process costing systems.

In this chapter, you will also learn the terminology used to track costs within the job order cost system and how to segregate and aggregate these costs to determine the costs of production in a job order costing environment. You will also learn how to record these job costs and where they appear on financial statements. In order to calculate accurately, we will need materials, direct labor, and factory overhead costs. A job order costing system is the best method for businesses or companies to calculate the required cost for labor, overhead, and materials before producing any items or services. We’ll use a service business next to illustrate the basic idea of job costing, but first, check your understanding of the differences between job costing and process costing.

It offers businesses the opportunity to verify the costs one by one and identify the included products. Wood and fastener metals are typically added at the beginning of the process and are easily tracked as direct material. Sometimes, after inspection, the product needs to be reworked and additional pieces are added.

1 Distinguish between Job Order Costing and Process Costing

The choice of costing system depends on the type and nature of the production and the information needs of the managers and customers. Generally, job order costing is more suitable for products or services that are unique, customized, or made to order. Process costing is more suitable for products or services that are homogeneous, mass-produced, or standardized. However, some industries or businesses may use a combination of both systems or a hybrid system to capture the best features of both systems. For example, a car manufacturer may use process costing for the assembly line and job order costing for the customization options. 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.