Job-Order Costing Versus Process Costing
Job-Order Costing Versus Process Costing
Job-Order Costing Versus Process Costing
COSTING
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determined by dividing the total costs charged to a cost
center by the output of that cost center. In that sense, the
unit costs are averages. Process costing is appropriate for
companies that produce a continuous mass of like units
through a series of operations or processes. Process costing
is generally used in such industries as petroleum, coal
mining, chemicals, textiles, paper, plastics, glass and food
processing.
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processing situation, some form o hybrid of the two systems
has proved to be the optimal system.
Those industries that are most suitable for process
costing have the following characteristics:
Production quantity is uniform.
One order does not affect the production process.
Customer orders are filled from the manufacturer’s
stock.
Continuous mass production through an assembly line
approach.
A standardization of the process and products exists.
Cost control on a departmental basis rather than on a
customer or product basis is desired.
Continuity of demand for the output.
Quality standards can be implemented on a
departmental basis – for example, on-line inspection
as processing proceeds.
There are four basic steps in accounting for process
costs:
Summarize the flow of physical units. The first step will
encompass a summary of all units on which some work
done in the department during the period. Input must equal
output. This step helps detect “lost units” during the process.
The relationship may be expressed in the following equation:
Beginning inventory + Units started for the period =
Units completed and transferred out + Ending inventory
Compute output in terms of equivalent units. In order to
determine the unit costs of a product in a processing
environment, it is important to measure the “total amount of
work” done during an accounting period. A special problem
arises in processing industries in connection with how to
deal with work still in process. Partially completed units are
measured on an “equivalent whole unit basis” for process
costing purpose. Equivalent units are measure of how many
whole units of production are represented by the units
completed plus partially completed units.
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Summarize the total costs to be accounted for and
compute unit costs per equivalent unit. This step
summarizes the total costs assigned to the department
during the period. The unit costs per equivalent is compute
as follows:
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To estimate the degree of completion for
conversion, determine what proportions of the total effort
(in terms of direct labor and overhead) are needed to
complete one unit or one batch of production. Industrial
engineers should be able to measure the proportion of
conversion needed with reasonable accuracy.Instead of
putting effort into estimating the actual stage of completion,
the assumption is often made that work still “in process” at
the end of the accounting period is 50% complete. Some
companies ignore the work in process completely and show
no work in process inventory account. However, this
approach is acceptable only if the work in process inventory
is insignificant in amount or if it remains relatively constant
in size.
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division, department or section. The number of processing
departments designated as cost centers will depend on the
detail desired by management. Cost centers should be setup
along organizational lines for control purposes.
Management weights the cost-benefit relationship in
deciding on the number of cost centers desired.
Conclusion
A job-order cost system is used when
heterogeneous products are involved. A capacity measure
should be chosen that best suits the company’s planning and
performance evaluation objectives. For example, if
management wants to establish a more rigid production goal
to increase productivity, it would use practical capacity
rather than normal capacity. Process costing is a primary
approach to assigning manufacturing cost to units produced.
It is used by manufacturers whose products are produced on
a continuous basis, with units receiving equal attention in
each processing center. The four steps in process costing are
the computation of equivalent units, calculation of the unit
cost, figuring the cost of completed production, and the
valuation of the ending work-in-progress. If units are
spoiled or defective, the per-unit cost of good units will
increase.
References:
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