Why do companies use job order costing?
Job order costing system is generally used by companies that manufacture a number of different products. It is a widely used costing system in manufacturing as well as service industries. Manufacturing companies using job order costing system usually receive orders for customized products and services. These customized orders are known as jobs or batches. A clothing factory, for
example, may receive an order for men shirts with particular size, color, and design. When companies accept orders or jobs for different products, the assignment of cost to products becomes a difficult task. In these circumstances, the cost record for each individual job is kept because each job have a different product and, therefore, different cost associated with it. The per unit cost of a particular job is computed by dividing the total cost allocated to that job by the number of
units in the job. The per unit cost formula is given below: Per unit cost = Total cost applicable to job / Number of units in the job Job order costing is extensively used by companies all over the world. According to a survey, 51.1% of manufacturing companies in United States use job order costing. Examples of manufacturing businesses that use job order costing system include clothing factories, food companies, air craft manufacturing companies etc. Examples of
service businesses that use job order costing system include movie producers, accounting firms, law firms, hospitals etc. Learning Objective
Question: A process costing systemA system of assigning costs used by companies that produce similar or identical units of product in batches employing a consistent process. is used by companies that produce similar or identical units of product in batches employing a consistent process. Examples of companies that use process costing include Chevron Corporation (petroleum products), the Wrigley Company (chewing gum), and Pittsburgh Paints (paint). A job costing systemA system of assigning costs used by companies that produce unique products or jobs. is used by companies that produce unique products or jobs. Examples of companies that use job costing systems include Boeing (airplanes), Lockheed Martin (advanced technology systems), and Deloitte & Touche (accounting). What are the similarities and differences between job costing and process costing systems? Answer: Although these systems have marked differences, they are also similar in many ways. (As you read through this section, refer to Chapter 1 "What Is Managerial Accounting?" for a review of important terms if necessary.) Recall the three inventory accounts that accountants use to track product cost information—raw materials inventory, work-in-process inventory, and finished goods inventory. 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. Thus each department has its own work-in-process inventory account. (For the purposes of this chapter, assume each department represents a production process. This explains the term process costing because we are tracking costs by process.) The sum of all work-in-process inventory accounts represents total work in process for the company. Recall the three components of product costs—direct materials, direct labor, and manufacturing overhead. Assigning these product costs to individual products remains an important goal for process costing, just as with job costing. However, instead of assigning product costs to individual jobs (shown on a job cost sheet), process costing assigns these costs to departments (shown on a departmental production cost report). Figure 4.1 "A Comparison of Cost Flows for Job Costing and Process Costing" shows how product costs flow through accounts for job costing and process costing systems. Table 4.1 "A Comparison of Process Costing and Job Costing" outlines the similarities and differences between these two costing systems. Review these illustrations carefully before moving on to the next section. Figure 4.1 A Comparison of Cost Flows for Job Costing and Process Costing Table 4.1 A Comparison of Process Costing and Job Costing
Business in Action 4.1The Production Process at Coca-Cola The Coca-Cola Company is one of the world’s largest producers of nonalcoholic beverages. According to the company, more than 11,000 of its soft drinks are consumed every second of every day. In the first stage of production, Coca-Cola mixes direct materials—water, refined sugar, and secret ingredients—to make the liquid for its beverages. The second stage includes filling cleaned and sanitized bottles before placing a cap on each bottle. In the third stage, filled bottles are inspected, labeled, and packaged. 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. Once products are delivered to retail stores, product costs are transferred from finished goods inventory to cost of goods sold. Key Takeaway
Review Problem 4.1Identify whether each business listed in the following would use job costing or process costing.
Solution to Review Problem 4.1
Why would a company use job order costing instead of process costing?Businesses use job order costing for small batches of customizable or unique products and individual job orders, while businesses use process costing for mass-produced or standardized products. Typically, in process costing, the products produced are the same or very similar.
What companies would use job order costing?Examples of manufacturing businesses that use job order costing system include clothing factories, food companies, air craft manufacturing companies etc. Examples of service businesses that use job order costing system include movie producers, accounting firms, law firms, hospitals etc.
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