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Job costing and process costing introduction
How does job costing system differ from process costing system
Job costing and process costing introduction
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Process Costing: A How-To Guide 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 …show more content…
Process costing is a way of breaking down cost that goes into each product manufactured. This allows for the correct pricing of the product as well as looking at possible inefficiencies in the production process. The following reasons explain the importance of correctly allocating cost to each product. • “Products must be sold in small quantities, sometimes one at a time (automobiles, loaves of bread), a dozen or two at a time (eggs, cookies), etc. • Product costs must be transferred from Finished Goods to Cost of Goods Sold as sales are made. This requires a correct and accurate accounting of product costs per unit, to have a proper matching of product costs against related sales revenue. • A fraction-of-a-cent cost change can represent a large dollar change in overall profitability, when selling millions of units of product a month. Managers must carefully watch per unit costs on a daily basis through the production process, while at the same time dealing with materials and output in huge quantities” (From Academic …show more content…
Product costs become part of the cost of Finished Goods, which flows to Cost of Goods Sold. Sales and administrative costs are treated as Period costs against related revenue for the same time period, one year in this case (Wyzant). Equivalent Units of Production In the example above 6000 bikes were fully completed. However, in the real world not all units will be fully completed at the end of an accounting period, some will only be partially completed. Equivalent units of production will look at how to convert these partially completed units into completed units for accounting purposes. Equivalent unit calculations are used at the end of a month, to prepare monthly production reports. They are also used at the end of the year to determine ending inventory values. Steps Step 1. Determine total amount of units that are not fully completed. Step 2. Determine the how completed the units are, always expressed in a percent. Step 3. Multiply these two numbers to get the equivalent units of production. Step 4. This newly computed number can then be used for all calculations that require the number of completed product to used, for example in our above example with 6000
2. Increase accuracy in the product cost calculating. While using ABC, direct materials and direct labors can be classified into products, manufacturing overhead will be classified into the homogeneous cost pool. Then, apportioned the manufacturing overhead into products according to reasonable distribution cost standard. The standard of cost allocation becomes more direct and specific, leading to many traditional uncontrollable indirect cost changes into controllable direct cost. And this provides more accurate information to cost control.
Similarly systematic placement of other components related to cost accounting such as that of products purchased or sold, the record of the services provided by the health department and the expenses of the services acquired from different companies in the form of purchasing of machinery or hiring of experts for the training of a new machine imported. In addition to this record and data regarding the revenue obtained from customers and sales need also be included. (Penner 2003)
Overhead based on units sold includes only sales and marketing. Sales and marketing will be targeted mostly towards the products that are already on the market, and so units sold is the best way to associate the cost with each product. (Figure A)
Term “marginal” is extensively used and known with reference to the economics which means “extra”, whereas with economic view point the marginal cost is the cost of producing every extra unit; however the accounting terminology of “marginal” defines the cost incurred on production other than its fixed cost is the marginal cost. Simply, none of the technique is applied unless it serves the benefits and the marginal costing is used by the firms for its registered benefits. Among all its benefits the primary advantage it serves is its attempt to distinguish the fixed and variable costs, and the method only considers the related variable costs to be included in production cost and the fixed costs are thus later deducted out for ascertaining net profit. The inventory at the year-end is also valued on the bases of variable cost. With all these beneficial characteristics of the said system firms using marginal costing are clearly aware of its ...
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
Cost can be divided into fixed and variable and by considering into fact that fixed and variable cost can be unarguably split into two, even though they behave differently based on the level of sales of volumes. Since, cost is used in every field to determine the price of an item and the unit sold. Two of the main components of cost are fixed and variable cost and is used to differentiate between the costs that have no direct correlation to business and those that do.
UPS measure the product costs precisely in their G/L system. By using ABC Costing system, a more systematic and accurate product costs can be obtained. Cost insight can be improved with the precise work measurement standard and thus promote business improvement. The combination of costing and work measurement in ABC costing enables UPS to evaluate the financial performance of their organization and good decision-making can be made in product improvement, costing control and pricing.
For example: with the increase of the number of products produced, the cost of operating a machine also increase. Second we have batch level costs which is associated with batches; producing a multiple units of the same product that are processed together is called a batch. The third type is product level costs which arise from any activity in order to support the production of products. The fourth and the last type is facility level costs, this costs cannot be determined with a particular unit, product or batch; this costs are fixed with respect to batches, products and number of units produced. A single measure of volume is used for allocating costs to each service or product in traditional method for example: direct material cost, machine hours, direct labor cost and direct labor hours. A cost driver is an activity that generate costs, it can be generated by two types of costs the first is a particular machine 's running costs where the costs is driven by production volume as machine hours; the second is quality inspection costs where the cost is driven by the number of times the relevant activity occurs as the number of
Primary production of homogenous goods and several processes are undertaken for the finished product to be realized is what is called process costing. All stages of processing and costs accrued during manufacturing of a product will be added to the final batch of products. Keenness is
Many companies, particularly those in the manufacturing industry mostly produce products following a forecasting on demand. Though from time to time it can make them on receiving orders from its clients. The items that are made and the work which is completed in accordance with the order of a customers is called job. Hence, the costing process intended to establish the cost of a job is extremely important. Job order costing therefore is the costing system which establishes the cost of the jobs obtained from a client (Walther, n.d.). In this way, job order costing approximations the costs of producing products in line with clients' instructions.
...pplied. Cost estimation and analysis could ultimately determine major decisions in both the business and political worlds today, and play a crucial role even in our day to day lives. Through activity based costing one is able to see what areas need improvement and also whether or not a business will be successful after considering all the factors. These tools are very powerful in drawing wise conclusions from cost analysis and can be a priceless tool to have even in the field of engineering.
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.
Cost is known as monetary value that will contribute to the benefit or obtaining any other resources. In other words, cost is a resource that we sacrifice in order to capture profit in the business companies. As an example, we sacrifice electricity, material, labour and value of machine’s life which known as depreciation during the production of a car. Therefore, these sacrifices are known as cost. There are many different views or thoughts from different individual. From a buyer’s perspective, cost of an item or product is known as prices which are charged by the sellers that may include additional charges such as mark-up cost and production cost which make the products more expensive than the original prices
Cost optimization: Determine the product costs by tracing detailed cost using analytical tools. To maximize profit by detect precise cost of products, optimize margins by inventory valuation.
Of greater importance, job-order costing system needs to accumulate three types of information which include direct materials, direct labor, and overhead. These factors are highly important essentially because of the significant variations in the products produced. Hence, each product or batch has a job identification number and costs are accumulated by a job number. All the more, job-order costing systems requires detailed accounting information and thus the total cost of all jobs is accumulated in one work-in process inventory control account; details of the cost materials, labor, and overhead for each job are kept in subsidiary records called job-order cost sheets (Edmonds, Tsay, & Olds,