Job Order costing is followed where items produced are small in number and each job is distinct and made to order or as per customer specifications like a piece of furniture or construction of one building. All costs, with respect to that particular job, without any exception, irrespective of their nature, are collected in one place. This is required for purposes of accurate billing to the customer (Weygandt, Kimmel & Kieso, 2015). Hence accounting is done so as to accumulate all costs in the name of that Job.
Job costing involves keeping records of time and material charged to a job, whereas Process costing involves keeping a record of total/accumulated cost charged to a product
Job costing involves the cost of labor /salaries of labor, whereas Process costing involves the cost of manufactured product.
Job costing is for small production, whereas Process costing is for large production
In Job costing, the final value of the cost of a job can be carried out when a particular job is running on, whereas in Process costing, the final value of the product can be carried out when all the processes of making the product are completed
The Accounting of Manufacturing Costs in Process Costing
Manufacturing costs include the cost of raw materials issued to the process, labor working in the process, and other indirect/overhead costs like light, electricity, other ancillary inputs/supplies as well as allocated office salaries and administrative expenses. They are accounted process-wise, the finished product of this process after accumulating all the above-said costs becomes the input for the next process which already has opening WIP from the previous run (partially complete items). Thus accounting is essential to have a knowledge of the value of transferred-to -the -next-process items -as well as the WIP still left in the process.
Application of Labor and Overhead Costs in a Process Costing Framework
Whereas process costing is used where it involves long production processes and a huge volume of identical & homogeneous products are produced -like nuts, bolts, and screws -where individual items do not need that much care. Identifiable costs (like raw materials issued & labor costs of labor working in that process) are charged specifically to the process and all other costs are allocated/applied at a predetermined rate and that bulk cost is divided among the output unit (Kaplan & Atkinson, 2015). So, accounting is done process-wise, and overheads are applied to the process on a pre-fixed rate. Lastly, in a process costing system, overhead costs are traced to units of the product as they are incurred.
The Reason for Determining the Cost per Equivalent Unit
It is important to separate the cost per equivalent unit for direct materials and conversion cost because Percentage completion of direct material, as well as conversion cost, is different, so separating the cost helps in determining the cost associated to work in process and ending inventory. It is the basis for final cost allocation between work in process and finished goods (Weygandt, Kimmel & Kieso, 2015).
The Essence of the Cost of Production Report
Cost of production report is essential to know the cost of units produced- each element of cost-wise - and thus they can be monitored and controlled- for both fully completed and partially completed units. A cost of production report has 5 parts. Firstly, the physical flow of units through the process - input and output units are tallied. In the second part, equivalent units are calculated taking into account the % of completion. Third, total costs for the process are reported (Horngren et.al, 2005). Fourthly, costs as per 3 are divided by the equivalent units as per 2 -to get the cost per equivalent unit of each element of cost. Finally, costs are assigned to the completed units and Ending WIP as per the cost obtained
Are there different ways of determining the cost of completed and transferred out units, and the cost of ending work in process inventory?
Yes. There are different ways of determining the cost of completed and transferred out units, and the cost of ending work in process inventory- like FIFO, Standard cost, and the Weighted Average method of cost calculations.
To determine how much cost should be transferred out of Work in Process Inventory, multiply costs per equivalent unit by the number of equivalent units associated with units completed. add the cost of beginning inventory and current period costs multiply costs per equivalent unit by the number of equivalent units associated with ending invent subtract the cost of beginning inventory from current period costs (Weygandt, Kimmel & Kieso, 2015).
A case in point of a product environment appropriate for employing a process-costing framework
Process costing is utilized when there is large-scale manufacturing of comparable items, where the expenses related to outputs individual units can't be separated from each other. At the end of the day, the cost of every item delivered is thought to be the same as the cost of each other item (Horngren et.al, 2005). As per this concept, expenses are collected over a settled timeframe, compressed, and after that designated to the greater part of the units delivered amid that timeframe on a predictable premise. At the point when items are rather being made on an individual premise, job costing is utilized to aggregate expenses and assigns the expenses to items. At the point when a creation procedure has some mass manufacturing and some modified components, then a crossbreed costing framework is utilized.
Horngren, C. T., Sundem, G. L., Stratton, W. O., Burgstahler, D., & Schatzberg, J. (2005). Introduction to management accounting. Upper Saddle River, New Jersey: Prentice Hall.
Kaplan, R. S., & Atkinson, A. A. (2015). Advanced management accounting. PHI Learning.
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2015). Financial & Managerial Accounting. John Wiley & Sons.
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