In the first stage of production, Coca-Colamixes direct materials—water, refined sugar, and secretingredients—to make the liquid for its beverages. The second stageincludes filling cleaned and sanitized bottles before placing a capon each bottle. Process costing averages costs across a high volume of homogeneous units and is suited to continuous mass production.
Differences Between Job Costing and Process Costing
Processcosting systems track costs by processing department, whereas jobcosting systems track costs by job. Regardless of the costing system used, manufacturing costs consist of direct material, direct labor, and manufacturing overhead. Figure 5.2 shows a partial organizational chart for Rock City Percussion, a drumstick manufacturer. In this example, two groups—administrative and manufacturing—report directly to the chief financial officer (CFO).
The production department uses the material and design specifications and adds additional labor to create the sign. The sign is transferred to the finishing department for final materials and labor, before the sign is installed or delivered to the customer. Since there are eight slices per pizza, the leftover pizza would be considered two full equivalent units of pizzas. The equivalent unit is determined separately for direct materials and for conversion costs as part of the computation of the per-unit cost for both material and conversion costs.
PRODUCT
Job Order Costing provides detailed cost information for each job, allowing businesses to analyze profitability at a granular level. On the other hand, Process Costing provides a broader overview of costs at the process or department level, which is useful for analyzing overall efficiency and identifying areas for improvement. Identify whether each business listed in the following would usejob costing or process costing.
In summary, job costing micro-tracks expenses per unique production job, while process costing macro-tracks costs by production process over time. The method selected depends on the type of manufacturing environment and products produced. Technology makes it easy to track costs as small as one fastener or ounce of glue. However, if each fastener had to be requisitioned and each ounce of glue recorded, the product would take longer to make and the direct labor cost would be higher. So, while it is possible to track the cost of each individual product, the additional information may not be worth the additional expense.
Similarities between job order costing and process costing
The choice of cost accumulation system depends on the variety and type of products or services sold, or the type of manufacturing processes employed. The system used should be determined by weighing the cost of collecting the data and the benefit of having that information. Each costing system has its own advantages and disadvantages depending on the type and nature of the production and the information needs of the managers and customers. Job order costing has the advantage of providing more detailed and accurate information for decision making, planning, control, and evaluation of each job or project. It also allows for more flexibility and customization in pricing and bidding. However, job order costing also has the disadvantage of being more costly, time-consuming, and error-prone due to the complexity and frequency of the calculations and adjustments.
Comparative Analysis: Job Order Costing vs Process Costing
At the Peterbilt factory in Denton, Texas, the company can build over \(100,000\) unique versions of their semitrucks without making the same truck twice. Recall the three components of product costs—direct materials,direct labor, and manufacturing overhead. Assigning these productcosts to individual products remains an important goal for processcosting, just as with job costing. However, instead of assigningproduct costs to individual jobs (shown on a job cost sheet),process costing assigns these costs to departments (shown on adepartmental production cost report). A process costing system is used when the products or services are homogeneous, mass-produced, or standardized.
- It tracks costs for each unique job and provides more accurate cost data when production differs across orders.
- A process costing system is often used to trace and determine production costs when similar products or services are provided.
- Regardless of the costing method used (job order costing, process costing, or another method), manufacturing companies are generally similar in their organizational structure and have a similar flow of goods through production.
- Maria sees this as an opportunity to enter a niche market for busy families or individuals who want home-cooked meals with a variety of options and combinations, but who have little time.
- However, job order costing also has the disadvantage of being more costly, time-consuming, and error-prone due to the complexity and frequency of the calculations and adjustments.
- Each costing system also requires the ability to obtain and analyze the cost data, and the more detailed the information needed, the higher the cost of collecting the data.
How do you compare and contrast job order costing and process costing systems?
It also assumes that the costs are evenly distributed among the units of output, which may not be realistic or fair. One of the main differences between job order costing and process costing is the level of detail and accuracy in costing. Job order costing provides more detailed and accurate information about the costs and profitability of each individual job or project. Process costing provides more aggregated and averaged information about the costs and profitability of the entire production process or product line.
- The next step is to decide on an activity level that causes you to incur each overhead cost.
- In addition to setting the sales price, managers need to know the cost of their products in order to determine the value of inventory, plan production, determine labor needs, and make long- and short-term plans.
- Table 4.1 outlines thesimilarities and differences between these two costing systems.Review these illustrations carefully before moving on to the nextsection.
- Companies that mass produce a product allocate the costs to each department and use process costing.
- Job Order Costing is suitable for customized or batch production, providing detailed cost tracking for each job or order.
- Batch 1 might be 1,000 solid black masks, while batch 2 is 1,500 red and white striped masks.
With processing, it is difficult to establish how much of each material, and exactly how much time is in each unit of finished product. This will require the use of the equivalent unit computation, and management selects the method (weighted average or FIFO) that best fits their information system. In addition to setting the sales price, managers need to know the cost of their products in order to determine the value of inventory, plan production, determine labor needs, and make long- and short-term plans. They also need to know the costs to determine when a new product should be added or an old product removed from production. Since a typical tax return can vary significantly from one taxpayer to the next, H&R Block provides a service that they customize for each customer.
Chemical Manufacturing and Consistent Costing
While making drumsticks may sound simple, an immense amount of technology is involved. Rock City Percussion makes 8,000 hickory sticks per day, four days each week. The sticks made compare and contrast job-order and process costing systems of maple and birch are manufactured on the fifth day of the week.
Understanding the full manufacturing process for a product helps with tracking costs. This video on how drumsticks are made shows the production process for drumsticks at one company, starting with the raw wood and ending with packaging. In this chapter, you will also learn the terminology used to track costs within the job order cost system and how to segregate and aggregate these costs to determine the costs of production in a job order costing environment. You will also learn how to record these job costs and where they appear on financial statements.