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Debate between Job Order Costing and Process Costing
Table of Content
PART 1 INTRODUCTION 1
PART 2 COSTING SYSTEM 2
1. Job Order Costing (JOC) 2
2. Process Costing (PC) 3
PART 3 ACCOUNTING METHODOLOGIES 4
1. Last-In-First-Out (LIFO) 4
2. First-In-First-Out (FIFO) 5
3. Comparison between LIFO and FIFO 6
PART 4 CASES STUDY 7
Case 1 – Law Firm 7
Case 2 – Furniture Manufacturing Industry 7
Case 3 – Bakery 8
PART 5 CONCLUSION 9
PART 1 INTRODUCTION
This report to distinguish between and identify companies that may use the “Job Order Costing” and “Process Costing” which are the major types of costing systems that used in manufacturing and service company. Both of the costing methods are widely used to track costs and will be selected upon the level of details needed and the desires of management. Details will be described in Part 2.
Other than the costing systems, we should have good inventory control system as well. Inventory may consist of finished goods, work-in-process, raw materials, goods for resale and spare parts that held by the company. It is important to have a control system to the inventory and record down the value of inventory as to ensure the availability of inventory items and prevent from excessive of inventory, which may lead the company out of cash flow. A perpetual system should be maintained on continuous basis to record down the inventory changes and periodic system will be updated periodically.
Last-in-first-out (LIFO) and First-in-first-out (FIFO) are two different ways of accounting methods that set a value to the inventory and calculating the profit, manage and record down the inventory and financial transactions that involved in a compa...
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...d for a long time or being destroyed. This may lead the loss to the business.
PART 5 CONCLUSION
According to the above, FIFO are generally applied while the relevant taxation departments don’t accept LIFO. It is because the actual costs of production overstated and net income will be less, thus, taxation payment will be lower. On the other hand, LIFO is attracted as it may lead the company has higher cash flow as lower taxation payment and it buffers the effects of inflation.
FIFO are widely used because of it is easier for the employee to manage the inventory account which is not as complicated as the LIFO. The employee just need to check out the item price at the current stock records while LIFO requires employee to amend the record once new item price come in.
Overview the LIFO and FIFO, FIFO are more acceptable and applicable to nowadays business.
Moncrief Company agreed to pay Jim Lester 20% of the gross profit made from the 2013 sales of the Zelenex. Between January 1, 2013 and December 28, 2013, Moncrief’s total available units for sale were, 50,000 units of Zelenex for $30.00 per unit ($1,500,000). Also in addition to the former activities, Moncrief sold 35,000 units for $60.00 per unit ($2,100,000). Moncrief Company uses periodic LIFO inventory method as a result, Jim Lester was to receive $210,000. (Textbook pg.469)
As a retailer and a supplier, Sobeys has an extremely large balance in their inventory account. During 2015, the inventories are more than 50% of the total current assets, and 13% of the total assets. We will compare the inventory accounts of 100 randomly chosen locations out of the 258 locations, as well as the 3 Cash & Carry stores. The company’s main portion of the total inventories would be food related, and they have certain shelf lives. If the unsold inventories are sitting in the warehouse for too long, then the inventory will be unable to sell, and this brings risk to future revenues. So the company should monitor the entire food related inventory, and strictly follow the FIFO rule. We need to compare the average inventory on hand ratio to other competitors in the same industry to find out if the inventory control has serious issues. Also, inquire inventory evaluation at the warehouses and possibly observe a test count done by
The IRS allows for multiple methods for figuring cost basis on stock. The methods allowed are specific share identification, first in first out (FIFO), or average basis. Specific share identification is just what it says; you identify the shares you are selling based on the lot that you purchased them in. With FIFO, the IRS takes the assumption that you sold the first shares you bought. This usually ends up being the least tax efficient way to sell shares, as share prices increase over time and the first share you bought would have the lowest basis. The IRS also allows you to elect to use average basis method. This method allows you to take the average of shares you purchased and multiply it by the amount of shares you are selling. In order to take this election you must send written notice to the broker or servicer of your account. On the following page is an example of a basic computation of basis for each method.
Once they develop and implement this inventory control system, inventory records are going to be upheld truthfully and that they will get the accurate standing of the inventory up-to-date. In order to maintain the steady continuous supply for production need... ... middle of paper ... ... ory holding costs, ordering costs, and shortage costs, and have a classification system for inventory items. In conclusion, while reading the case study, I saw much disorganization throughout the company’s entire system.
John Deere Component Works (JDCW), subdivision of John Deere and Co. was in charged specifically of the manufacturing of tractor component parts. The demand for JDCW’s products had problems due to the collapse of farmland value and commodity prices. Numerous and constant failures in JDCW’s competition for bids, alerted top management to start questioning their current costing methods. As an outcome, the analysis has to be guided to research on the current costing methods with the intention of establishing legitimacy and to help the company in adopting a more appropriate costing system.
The amount each company should recognize as expense is given in a given year depends on the following factors
Financial Accounting Standards Board. (1985). Statement of Financial Accounting Standards No. 86. Norwalk. Retrieved April 7, 2014, from http://www.fasb.org/cs/BlobServer?blobkey=id&blobnocache=true&blobwhere=1175820922177&blobheader=application%2Fpdf&blobheadername2=Content-Length&blobheadername1=Content-Disposition&blobheadervalue2=189998&blobheadervalue1=filename%3Dfas86.pdf&blobcol=url
Imagine that you have just earned your business degree and have been hired as a hospital administrator at a small hospital that, like many others, is experiencing financial problems. Having studied finance, you know that efficient cash management is important to all firms in all industries to meet the day-by-day operations of the firm. One way to ensure such efficiency is to use a carefully planned and managed inventory control system that can reduce the amount of cash an organization has tied up in inventory. Being familiar with Just-In-Time Inventory, you know it is a proven system that helps reduce the costs of managing inventory.
Process costing System is an accounting expression which describes one method to determine the manufacturing costs to the units manufactured . Processing is typically used when similar units are mass produced. Also process costing system is a type of accounting process costing which is used to determine the cost of a produced inventory. Chartered Institute of Management Accountants (CIMA) defines process costing as " The costing method applicable where goods or services result from a sequence of continuous or repetitive operations or processes. Costs are average over the units produced during the period, being initially charged to the operation or process "( College Accounting Coach, 2007). Process costing is more important and appropriate for all businesses producing identical products during which production is an ongoing flow. Toyota is on the of the major companies in the world that used well-known new philosophic management to produce identical products using process costing system.
Albrecht, W. S., Stice, J. D., Stice, E. K., & Skousen, k. F. (2002). Accounting Concepts and Applications. Cincinnati: South-Western.
The overall purpose of cost accounting is to advise top administration and the management team on the most suitable and cost effective methods and actions to employ based on cost, capability and efficiencies of a given product or service. It can be defined as the method where all the expenditures used during execution of business activities are gathered, categorized, examined and noted down (Horngren & Srikant, 2000). Once these numbers are gathered and recorded the information is used to determine a selling price and/or to identify possible investment opportunities. Although the principal aim or function of cost accounting is to help the business administration with their decision making and business planning process, the cost accounting data
There are two main types of cost accounting systems, job costing and process costing. In job costing, each job is tracked separately. For example, a company that install roofs can keep track of each cost separately. They can easily track labor by tracking the total amount of human hours spent of the job and what each person was paid. Materials can easily be tracked by tracking the total costs of supplies needed to complete the job. For job costing the total costs of each job can be easily tracked. Some examples of professions that use job costing are carpenters, painters, and computer repair. In process costing, a large number of the same or very similar products are produced in large numbers - examples include
An organization costing system is a system that helps the management with the strategy planning while the system plays an important role in providing accurate cost information about the products and customers (Curtin, 2006). UPS utilizes the Activity-Based Costing (ABC) system. ABC assumes that activities cause costs and that cost objects create the demand for activities (Marx, 2009). The key to cost allocation under ABC is to identify the activities that are performed to provide a particular service and then aggregate the costs of the activities (Gapenski, 2012). This is a marked departure from the practice of sharing overheads costs equally or overheads becoming part of the overall profit-loss estimate instead of component product pricing (Nayab, 2011).
Cost accounting system has two types, job order costing, and process cost system. These two cost systems are very different, almost every company uses order costing or process costing. Starbucks, is a coffee shop where citizens congregate to drink there morning coffee, study, and or socialize. Starbucks is one of the oldest and largest privately held specialty coffee retailer in the United States. (Starbucks) Their passion is to discover the flavors you love and always bring it home, delivering the look, taste and aroma of the world’s best coffee and teas. Job order costing is a very easy way in order to help Starbucks managers to know how much profit their company (Starbucks) made.
FIFO (first in first out method); is reported by taking the first purchases bought based on the number of units sold multiplied by the price unit. In this situation the items acquired first are cheaper and then the cost continues to rise for price per unit. Thus, the ending inventory is what is left over which has a higher cost of price per unit.