Job Order Costing and the Process Costing
Job Order Costing and the Process Costing
The accounting cost process is an important aspect in any company in order for the managers to determine the flow of their costs in connection to their production. Basically, there are two methods that commonly used as the job order cost accounting and the process cost accounting. The job order cost in accounting can be used in manufacturing of the firms which has the products of custom made which includes the engineers, printers, manufacturers, trains, ships, highways and dams’ contractors, and the defense contractors. The process cost accounting on the other side is using for the firms that uses the mass production as the clothing firms, the firms, chemicals, oil refineries and the floor grinding firms. These approaches to cost accounting into the manufacturing environment have certain differences and similarities. In the job order costing, the accumulation has the basis for the relevant costs into the job or to the work orders which are normally specifies into the quantity of the specific products that needs to be manufactured. This signifies that the job order are all relevant cost in the specific lot specified by job order and accumulated in contrast to the order regardless the given period wherein they are incurred. On the other hand, the process costing system requires all of the costs being incurred into the cost center or particular process are accumulated against the process itself into the specified period. Nevertheless, these two methods have the same goal of assigning into the same labor, overhead cost, and to materials.
The process cost of accounting is an important process for many of the companies which engage their business in keeping the track for which the money had been spent for the distribution and into the production process. In understanding the costs will be the initial step for controlling allocating and controlling them. Therefore, it is only important that the company needs to choose the precise system of costing for the industry and to the product type. There are many processes in the costing systems which are being used by most of the industries and the example of which is the process costing and the job order costing. These types of costing system which the cost accountants and the management are using can have the differences. Every costing system that can handle by these costing procedures may have different way of entries (Bradford, 2008).
The process costing and job-order costing are the major products costing that approaches for the accumulating the cost in order to assign the services and products. Thus, the concept of product costing is accomplished though the process costing and to job order costing system. Whatever the chosen approach of product costing, the managers needs to make the number of decisions which can require the information to the cost of treating the customers. The process costing can be used in the industries which can produce some of the homogenous products as the flour, bricks, and cement in the continuous process. The job order costing is the system of cost wherein the cost can be accumulated by the jobs (Nurre, 2008).
Process Costing and Job Order Costing – An Overview
The process costing system is the ways wherein the manufacturing cost had been accumulated at the processing department. The said department is the location of the organization whereas the work had performed for the product in which the materials, the overhead costs, and labor are added into the product. Therefore, at the processing department must have two other features. The first one is the fact that the all the activity that passes by the processing department must be the same fro all of the units that pass into the department. The other one need to have the output of the department must be the homogenous. In the costing process, the average processing unit cost in the period needs to be assigned in every unit that part into the department. In the process costing system, there are two methods which had been illustrated and they are the FIFO or the first in first out method and the weighted average method. The FIFO method can provide accurate and current cost of data in the purpose of performance and decision making evaluation. The other one is the LIFO method or the last in first out which most of the companies prefer to use in the valuation of inventory due to the assumption that there are normally inflammatory pressures. Thus, in the favorable economy, the taxes and the reported profit can be minimized while the economy falters if the inventory can be reduced based on the lowering of the cost values though the profits can be maximized. However, with LIFO as basis, it will call for higher prices for the selling of prices and based to the items sold. On the other hand, the job-order costing had been recognized when the cost and the other data are being recorded to the materials requisition forms, job cost sheets, and to the time tickets. Since, nowadays, most of the companies are entering into the computer databases as well as the dispensed of the paper documents. But, the data in the computer are consisting of the virtual version into the manual system. The principal flow of the costs in the job-order system is primary begins in the records of the cost, the materials, and the labor as well as manufacturing of the overhead. The manufacturing of the overhead control account were all been temporary control account. In this system, it is also used for the different types of jobs, products, and batches being produced which are typically over and rather than the short period of time. In this costing system, the direct material cost and the direct labor costs are usually traced into the jobs. The overhead is applied to the jobs whereas it is used in the predetermined rate and the actual overhead costs are not being traced into the jobs. The industries which the used the job-order costing includes the shipbuilding, the printing, the hospitals, constructions, and the professional services as the movie studio and the law firms (Ibid).
Similarities and Difference of Job Order Costing and the Process Costing
The job order costing and the process costing are sharing their same characteristics whereas they both have the same basic aims which is to assign into the labor, assign material, and the overhead cost for the products. Both of the systems that are being used are all been used into the same basic manufacturing accounts which can be segmented as the Raw Materials, Manufacturing Overhead, and the Work in Process as well as the Finishing Goods. They are also the similar when it comes to the flow of the costs as it was through the manufacturing accounts. There are differences between the process costing and the job order whereas the job order for the companies can make the limited quantities for the specific services of the customers while the process costing is using into the companies that can make the quantities for the homogenous output on the continuous operations. The cost in the process costing is all accumulated into the department and not by the individual job. The production report department is the key document in the showing of accumulation, the process of costing, and into the disposition of cost while the job order costing has the key document of cost sheet (Kinney, et. al., 2005, p. 130).
In the job order costing, it requires it does not allow much of computations for the cost per unit when all of the units. The job order cost can either use the normal cost system which combines the direct labor, actual direct materials with the aide of the predetermined overhead system of standard cost or the actual cost system that combines the direct labor, the direct material, and the overhead. The process costing can use the same type of the system cost valuation though the standard cost system can significantly more prevalent at the costing process ac compared to the job order cost. Since at the job order costing, it requires sheet in tracking for the direct material, the actual or applied overhead, and the direct labor for every customers while the process costing simply accounts for the direct materials and labor, the actual or the applied overhead, and the and the batch at every department (Ibid, p. 131).
The other difference which accounted between the two can be determine as the job order costing except to the repair of work and to the certain applications has the basis of accumulating the relevant costs into the work or to the job that are primarily specifies to the quantity of the particular product that needs to be manufactured. The cost that required the performance of the specified operations are all been accumulated in contrast to the job order which are being incurred while these costs are all attributed into the quantity for the item as produced under the job order. On the other hand, the process costing has the basis for the accumulation of the relevant costs can be considered as process while or it is somewhat said to be cost center. The said cost then are being attributed into the quantity produced for the homogenous product output or for the process during the time period for over the costs had been accumulated. The key differences for the concept of the two approaches can be seen into the bases of the cost accumulation. For the system of job order, the entire relevant costs for the particular lot can be specified by the job orders as they are accumulated against the order with regards to the periods of the incurred. In the process costing system, the entire relevant costs that incurred into the particular process or the process of costing into the accumulated against the said process in the specific period. In either way, the costs being accumulated can be computed by dividing the recorded production in yield units cost for the production (Davidson and Weil, 1991, p. 305).
Certain features in the process of costing method can differ as well to the job order system. In the process costing method, every process or stages of the production can becomes the center for the accumulation of the cost. Taking the example of the product that can go through the steps or to the processes as in cutting, the assembling, painting, finishing, and to the quality control or inspection. In this process method, the cost in carrying the every five processes in determined in separate ways. In this method, the costs are also accumulated by the process in the duration of the production run into the particular product or to the shorter period which is consistent to the normal accounting reporting periods. The number of the units that produced in the every process can be determined to the unit cost and to the process of calculating total cost in the period into the total number of units being produced. Determining the total or the final unit cost for the specific product is commonly one of the adding together for the units’ costs and for every process through the product flows. On the other hand, the job order costing have also features which can provide the basis for the managers in evaluating the efficiency of operation by the comparing the standard and the actual cost. The differences at the midst of the actual cost and the standard cost are all captured in the variance accounts which can analyze the variances wherein the managers can gain understanding for the factors which can cause the costs that can differ from the expected amounts. Additionally, both the normal and the abnormal losses can emerge in the system of ob order which can account in the normal losses and anticipated in the all of the jobs while included and estimated in the development for the predetermined overhead rate. The normal losses also can be associated in the particular job yet changed in the job and the abnormal losses are always been charged to the loss account the incurred period (Kinney, 1991, p. 131).
Every organization needs to have a range of options in distributing its cost of products. There are two primarily ends for the said spectrums which are the process costing and job ordering cost. Based on the aforementioned analysis, the organization that uses the job order costing is one which makes the unique, large, and or the special-order products. Thus, it is consider being a customer order in the specific number that specially designed for the product which is made to order. It measures the cost every complete unit. Thus, while products are manufactured, the direct labor and the direct materials are being transferred to the account of Process Inventory control. On the other side, the institutions that uses the process costing is the one that produce the large similar or amounts of liquids or products which has the continuous product flow. In this regard, at the system of process costing, the direct labor, direct materials, and the manufacturing overhead are traced primarily in work cells and to the processes but assigned to the produced products by the work cell or to the process. Generally, some of the companies are need of the process costing whereas the products are produced to the never ending or continuous basis. This methodology of tracking and capturing the costs associated to the form of process manufacturing is greatly different from the methodology needed in the use of the discrete process of manufacturing.
Davidson, S. and Weil, R. (1991). Handbook of Cost Accounting. Canada. CCH Tax and Accounting.
Kinney, R. et. al. (2005). Cost Accounting: Foundations and Evolutions, Canada. Thomson South-Western.
Nurre, R (2008). College of San Mateo Accounting 131. San Mateo County Community College District, Retrieved 22, September, 2008, http://www.smccd.net/accounts/nurre/online/chtr4.htm.
Bradford T. (2005, April 25). Types of Accounting Costing Systems. Accounting Suites 101. Retrieved 22, September, 2008, http://accounting.suite101.com/article.cfm/joborder_costing.