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Managerial Accounting Job Order and Process Costing. Definition of job order and process costing, Similarities and differences between two costing systems
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(Definitions of job order and process costing, Similarities and differences of two costing systems )
Process costing system is used in industries that produce essentially homogeneous products on a continuous basis, such as bricks, corn flacks, or paper. Process costing is particularly used in companies that convert basic raw material into homogeneous products. A processing department is any location in any organization where work is performed on a product and where materials, labor, or overhead costs are added to the product. A processing department is any location in any organization where work is performed on a product and where materials, labor, or overhead costs are added to the product. For example, a potato chip factory might have three processing department-one for preparing potatoes, one for cooking, and one for inspecting and packaging.
Regardless of the number of departments involved , all processing departments in a process costing system have two essential features. First, the activity performed in the processing department must be performed uniformly on all of the units passing through it. Second, the out put of the processing department must be homogeneous.
The processing departments involved in making a product would probably be organized in a sequence pattern. By sequential processing means that units flow in sequence from one department to another.
A different type of processing pattern, known as parallel processing, is used to make some products. A parallel processing is is used in situations where, after a point, some units go through different processing departments than others. For example, petroleum refiners separate crude oil into a number of intermediate products which then go through separate processes to create end products such as gasoline, heating oil, jet fuel, and lubricants.
Cost Accumulation in a process costing system:
Cost accumulation is simpler in process costing system than in job order costing system. In a process costing system, instead of having to trace costs to hundreds of different jobs, costs are traced to only a few processing departments. A separate work in process (WIP) account is maintained for each processing department. In contrast in job order costing there may be a single work in process (WIP) account for entire company. The completed production of the first processing department is transferred to the work in process account of the second department. where it undergoes further work, the completed units are then transferred to the finished goods. We have talked about two processing departments, but there may be many such departments in a company.
Material, Labor and factory over head (FOH) can be added in any processing department-not just in the first. Costs in the second departments work in process account consists of the material, labor and factory overhead costs incurred in second department plus the costs attached to partially completed units transferred in from first department. This cost is called Transferred in Cost.
A job order costing system is used in situations where many different products are produced. For example, clothing factory would typically make many different types of jeans for both men and women during a month. A particular order might consist of 1000 stonewashed men's blue denim jeans, style number A312, with a 32 inch waste and a 30 inch inseam. This order of 1000 jeans is called a batch or a job. In a job order costing system costs are traced and allocated to jobs and then the costs of the jobs are divided by the number of units in the job to arrive at an average cost per unit.
Job order costing is also used extensively in service industries, hospitals, law firms movie studios accounting firms advertising agencies, and repair shops all use a variation of job order costing to accumulate costs for accounting and billing purposes.
Material requisition forms and labor time tickets are used to assign direct materials and labor costs to jobs in a job costing system. Manufacturing overhead costs are assigned to jobs using a predetermined overhead rate. The predetermined overhead rate is determined before period begins by dividing the estimated total manufacturing cost for the period by the estimated total allocation base for the period. The most frequently used allocation bases are direct labor-hours and machine-hours. Overhead is applied to jobs by multiplying the predetermined overhead rate by the actual amount of the allocation base used by the job. Since the predetermined overhead rate is based on estimates, the actual overhead cost incurred a period may be more or less than the amount of overhead cost applied to production. Such a difference is called under or over applied overhead. Under or over applied overhead can be either (1)closed to cost of goods sold or (2)allocated between work in process finished goods and cost of goods sold.
Similarities between job order costing and process costing can be summarized as follows.
The differences between job order costing and process costing arise from two factors. The first is that the flow of units in a process costing system is more or less continuous, and the second is that these units are indistinguishable from on another. Under process costing it makes no sense to try to identify materials, labor, and overhead costs with a particular order from a customer ( as we do with job order costing ), since each order is just one of many many that are filled from a continuous flow of virtually identical units from the production line. Under process costing, we accumulate costs by department. rather than by order, assign these costs uniformly to all units that pass through the department during a period.
A further difference between the two costing systems is that the job cost sheet is not used in process costing, since the focal point of process costing is on departments. Instead of using job cost sheet a production report is prepared for each department in which work is done on products. The production report serves several functions. It provides a summary of number of units moving through a department during a period, and it also provides a computation of unit costs. In addition it shows what costs were charged to the department and what disposition was made on these costs. The department production report is a key document in a process costing system.
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