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

Process costing is used most often when manufacturing a product in batches. 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. Job order costing and process costing are the two main costing systems that are approved by Generally Accepted Accounting Principles (GAAP), which are the financial accounting standards used in the United States. Both costing systems share the same goal of assigning costs to products and services.

Because the frames have already been through each department, the additional work is typically minor and often entails simply adding an additional fastener to keep the back of the frame intact. Other times, all the frame needs is additional glue for a corner piece. E.g. DRA Company manufactures plastic bottles, and the production 5 1 Compare And Contrast Job Order Costing And Process Costing process operates with 3 departments and produced 6,500 bottles for the last month. Identify whether each business listed in the following would use job costing or process costing. In the first stage of production, Coca-Cola mixes direct materials—water, refined sugar, and secret ingredients—to make the liquid for its beverages.

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The organizational chart also shows the departments that report to the production department, illustrating the production arrangement. The material storage unit stores the types of wood used (hickory, maple, and birch), the tips (nylon and felt), and packaging materials. 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. The job order costing system is used when products are made based on specific customer orders where each unit produced is considered a job.

The accountant was stealing the money while making the stolen checks appear to be paying for material costs or operating costs. According to Texas Monthly, “Once Sandy was sure that nobody had noticed the first fraudulent check, he tried it again. 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.

Key Differences Between Job Costing and Process Costing

The production worker writes down the time he starts building the staircase on the job order cost sheet. Next, the production worker gathers and cuts all of the materials needed to length. He uses 14 white oak treads that are 42″ long, 13 poplar risers at 42″ long, and poplar stringer. The company provides a cost sheet that tells the per unit cost of each material and all lengths. After looking at the cost sheet, he writes down the materials used and multiplies it by cost.

This is determined by what the firm determines the percentage complete is. For example, if there are 100 units in the frame department and they are 50% complete, there are 50 equivalent units complete and transferred to the color department. The firm will solve for the cost per equivalent by dividing the total cost incurred during the period by total equivalent units. This number will be multiplied by the number of equivalent units to solve for the cost of equivalent units in each department.

Definition of Job Costing

For overall management decisions such as assessing company profitability, these individual job information is of limited use. For example, a prefabricated staircase manufacturer makes standard stairs and custom stairs. Technology makes it easy to track costs as small as one fastener or ounce of glue.

• When the products are unique in nature, the cost of producing two different products cannot be compared effectively since the amounts of materials, labor and overheads will vary from one job to another.
• This number will be multiplied by the number of equivalent units to solve for the cost of equivalent units in each department.
• The Coca-Cola Company is one of the world’s largest producers of nonalcoholic beverages.
• Since there are eight slices per pizza, the leftover pizza would be considered two full equivalent units of pizzas.
• The material storage unit stores the types of wood used (hickory, maple, and birch), the tips (nylon and felt), and packaging materials.

Job costing requires more record keeping whereas process costing requires less record keeping. It is the cost which is involved in specific work https://accounting-services.net/bookkeeping-philadelphia/ or jobs which are performed according to the customer’s needs. Job costing is used when goods are produced against only special orders.

Once products are delivered to retail stores, product costs are transferred from finished goods inventory to cost of goods sold. Understanding the full manufacturing process for a product helps with tracking costs. This video on how drumsticks are made shows the production process for drumsticks at one company, starting with the raw wood and ending with packaging. Under generally accepted accounting principles (GAAP), separating the production costs and assigning them to the department results in the costs of the product staying with the work in process inventory for each department. This follows the expense recognition principle because the cost of the product is expensed when revenue from the sale is recognized. For example, some items that are classified as overhead, such as plant insurance, are period costs but are classified as overhead and are attached to the items produced as product costs.

Now check your understanding of a job order costing system with this interactive. There is no comparison between Job Costing and Process Costing because both the methods are used in different industries. One such difference is, each job requires a high degree of supervision and control, but the process does not require so, as they are standardized in nature.

Middle Ground – Job Order Costing and Process Costing

Regardless of the costing system used, manufacturing costs consist of direct material, direct labor, and manufacturing overhead. Figure 5.2 shows a partial organizational chart for Rock City Percussion, a drumstick manufacturer. In this example, two groups—administrative and manufacturing—report directly to the chief financial officer (CFO).

• Process Costing is best suited for large-scale production is done as well as where there are multiple levels of producing a product.
• Although job order costing and process costing are different, both can be used by a single firm if the company provides products and services that fall under both costing methods.
• 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.
• Process costing can be calculated on either a first-in, first-out (FIFO) or weighted average basis.

Here process refers to a separate stage where production is performed to convert the raw material into an another identifiable form. Process Costing is used in the industry where identical products are produced in huge quantities. In the case of a not-for-profit company, the same process could be used to determine the average costs incurred by a department that performs interviews. The department’s costs would be allocated based on the number of cases processed.