Learning Engagement, Week 2:
- Compare and contrast each of these costing structures and provide examples from industry or companies as to how each costing system may be used.
- What are similarities and differences that companies use these systems to monitor?
PROFESSOR’S GUIDANCE FOR THIS WEEK’S LE:
This week we studied two main costing methods: job-order costing and process costing. Companies can use either method depending on what they are manufacturing for sale. You might also have companies that utilize both where they manufacture both custom/unique items and standard products. For example, Nike makes sports/active wear for the average consumer as well as special-order/unique items for specific colleges/professional teams.
It is important to understand the differences of these cost systems as they are geared towards what the company is making. For example, Lays, Inc. uses mainly a process costing system in the making of potato chips. Batches are created for different flavors or types of chips manufactured. While each batch may be different flavors, the process overall is homogenous in contrast to job-order costing. Job-order costing is focused more on unique or one of a kind product. Swimming pool construction is a job-order costing process. Even though the basic process of digging a hole, lining it with rebar, plastering, and finishing is approximately the same, there are unique features to consider. Size, shape, color of plaster, color of decorative tile/stone create that uniqueness which must be tracked for each job.
1. Please make sure that you read the relevant chapter from the textbook
2. Watch the YouTube videos for this week and additional course material provide
3. Ensure that you can communicate your point of view clearly and without ambiguity. Provide one example to strengthen your point of view in the main discussion.
1. Compare and contrast each of these costing structures and provide examples from industry or companies as to how each costing system may be used.Process costing is the optimal costing system because such a method uses a standardized process to produce identical products. On the other hand, job order costing is the optimal accounting method where the product specification and costs are not similar for the products. Under process costing, the cost of products is traced and recorded on the individual job cost sheet, and such charges are traced to process departments under process costing. Companies producing identical products in batches employ process costing (Hansen et al., 2021). Some companies that use this costing method include the Wrigley Company, Chevron Corporation, and Pittsburgh Paints. Companies producing unique products use job order costing; examples of such companies include Lockheed Martin, Boeing, and Deloitte & Touche. Under both the costing method, product cost consists of direct labor, direct materials, and manufacturing overhead. For decision-making under both scenarios, management needs to be inputted with unit cost information. There also exist similarities in inventory accounts under both methods because the report includes work in process, raw material, and finished goods inventories. 2. What are the similarities and differences that companies use these systems to monitor?The similarity in using these two-costing systems by the companies is to track the product costs being manufactured by them. In addition to this, companies can also use these methods to allocate the expenses such as labor, material, and time. The computation of unit cost under such methods requires using the same information. The company can identify the difference between the process and job order costing in terms of cost accumulation. Individual jobs accumulate costs under the job order costing, and each department earns costs under processing costs. The opportunity cost reduction is another difference identified when using such costing methods to monitor (Hiromoto, 2019). There are fewer opportunities for cost reduction under job costing compared to several cost reduction opportunities under process costing. ReferencesHansen, D. R., Mowen, M. M., & Heitger, D. L. (2021). Cost management. Cengage Learning.Hiromoto, T. (2019). Restoring the relevance of management accounting. In Management Control Theory (pp. 273-288). Routledge.
The comprehensive accumulation of production expenses attributed to single units or groups of units is referred to as job costing. A work costing system, for example, would account for the building of a custom-designed piece of furniture. All labor charges associated with that specific piece of furniture would be noted on a timesheet and then combined on a cost sheet for that task. Similarly, any wood or other elements utilized in the furniture’s construction would be charged to the manufacturing task associated with that piece of furniture.Process costing is the accumulation of expenses for long production runs with products that are indistinguishable from one another. For example, to calculate the cost per unit of 100,000 gallons of gasoline, every oil consumed in the process, as well as all labor in the refinery plant, must be aggregated into a cost account and then divided by the number of units generated. Costs are likely to be accrued at the department level and not at the organizational level (Accounting for Manag, 2022). According to Bragg (2022), the following are the primary distinctions between task order costing and process costing:Task order costing, as the name implies, entails costing for specific job orders. This means that direct expenses (material and labor) for each work done by a manufacturer can be directly related to each particular job. Process costing, on the other hand, is for greater volumes. Costs are given to processes rather than individual tasks when a large process is costed.Job order costing is utilized for the pricing of more distinctive and configurable items. This is often used for modest manufacturing orders. Process costing is used to cost more standardized items that are often manufactured in big quantities (Bragg, 2022).Job order costing necessitates more record-keeping tasks than a process costing. This is due to the fact that under work order costing, all relevant expenses are allocated individually to individual jobs, and for each job, a new job card is maintained, increasing the number of entries. Because all expenses are tied to a particular manufacturing process, all costs are aggregated and summarized during process costing. The cost is allocated to each product after the aggravation.Work order costing determines costs for each job independently, and because each job is independent of the others, no cost transfer is required. In process costing, however, expenses must be shifted from one process to the next (Vecchio, 2021).There are no job cost sheets in process costing since the production focus is on the output of departments. A production report is generated, which details the work done by each department during the manufacturing process. Given work cards and time clocks are kept by labor in job order costing, which reveals the precise time an employee has spent on an individual job so that the labor cost may be assigned directly to these jobs (Henry, 2022).The following are some parallels between task order costing and process costing:In a manufacturing process, both work order costing and process costing methods are used to allocate expenditures such as material, labor, and overheads (production and/or non-production) to the final products.For both costing methodologies, the inventory accounts utilized for recording accounting entries of production are nearly identical. Both costing techniques make use of fundamental accounts such as materials, work-in-progress (if job costing is used), and so on (Corporate Finance Institute, 2019). In both costing methods, the mechanism for dealing with excess or under-absorbed overheads is nearly the same. There are no separate batches in process costing; the expenses are distributed methodically. The work order costing system assigns overheads to specific tasks in the same way that the process costing system assigns overheads to an entire production process (Kesavan, 2022).T-accounts, also known as manufacturing accounts, are kept in both work order costing and process costing, and they include direct material, direct labor, and production overheads.The essential information obtained to arrive at the unit cost, which is calculated in both costing methods, is nearly identical and useful for internal company management. This information is used by the company’s management to make decisions (Vaidya, 2022). References Accounting for Management. (2022, June 20). Job order costing vs process costing. https://www.accountingformanagement.org/similariti… Bragg, S. (2022, June 10). The difference between job costing and process costing. AccountingTools. https://www.accountingtools.com/articles/what-is-t… Vecchio, L. (2021, December 13). Job Costing Vs Process Costing: The Key Differences. PLANERGY Software. https://planergy.com/blog/job-costing-vs-process-c… Henry L. (2022, September 3). How Does Process Costing Differ from Job Order Costing? https://blog.completepayroll.com/how-does-process-… Corporate Finance Institute. (2019, October 3). Job Order Costing Guide. https://corporatefinanceinstitute.com/resources/kn… Kesavan, S. (2022, March 17). What is Job Order Costing? | Definition, Importance, Formula. Essential Business Guides. https://www.zoho.com/inventory/guides/what-is-job-… Vaidya, D. C. (2022, June 18). Job Costing vs Process Costing. WallStreetMojo. https://www.wallstreetmojo.com/job-costing-vs-proc…