Job Order and Process Costing

Job Order and Process Costing

Hello Erin Johnson,

This is an excellent post, Eric Johnson. Both job order and process costing are elements of managerial accounting. As you have explained in the post, job order costing allows an organization that offers specific services to highlight the materials that are used in production. In addition, job order costing can also be used to highlight the cost of unique benefits that an organization offers its clients. For instance, a law firm is an ideal example that highlights the application of job order costing to special gifts that each client receives (CFI Education Inc., 2015-2022).

On the other hand, process costing is somewhat different because companies that offer standardized products can use it to determine the cost of production. I agree that job order costing is ideal in determining the cost of goods sold. Using this costing method allows the entity to assess each product’s charges and facilitate the setting of prices. I enjoyed reading your post.

Hello Classmate 2,

Thank you for this exciting post, Classmate 2. I agree that job order and process costing are different, as you highlighted in your post. I want to point out that job order costing deals with unique services that vary from one client to another. Accordingly, process costing is best suited for products that are uniform for all clients, such as Coca-Cola beverages. Thus, it is inevitable that process costing allows an organization to cost large-scale processes and activities (Process costing | Process cost accounting, 2021). Regardless of the scale of operations that each costing method is applied to, the two approaches are necessary for determining the cost that a company incurs to produce goods and services. I also like the presentation that you have provided regarding the impact on the financials. Interestingly, the scenarios you highlighted facilitate further understanding of the two types of costing.

References

CFI Education Inc. (2015-2022). Job Order Costing Guide.

Process costing | Process cost accounting. (2021).

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Job-order costing involves a detailed accumulation of the production costs that are attributable to specific units or groups of teams. An example would be the construction of custom saddles. The prices of the labor for that particular saddle would be recorded and compiled on a cost sheet, along with the cost of all materials used in that specific saddle. Process costing involves the accumulation of expenses for long-running productions involving products that are indistinguishable from each other. An example of this would be the production of thousands of gallons of gasoline that requires all the oil used and all the labor to be accumulated, then divided by the number of units. “The primary difference between the two systems centers on accounting for the work in process inventory” (Edmonds, 2020). The uniqueness of the products differs between the two methods. Job costing is used for unique products, while processing is used for more standardized products. Job costing is generally used for smaller production runs, while process costing is used for larger production runs. There is a lot more record-keeping required for job costing than there is for process costing. Both of these methods maintain the costs of direct materials, direct labor, and manufacturing overhead.

Job Order and Process Costing

A few events from the job-order costing system may affect the financial statements. A material requisition form is usually completed as raw material inventory transfers to work-in-process to ensure that the material costs are appropriately allocated. The labor costs are issued based on the completion of time tickets to identify the time workers spent on the job. Factory overhead costs are allocated using a predetermined overhead rate. Once the job is complete, the total costs of the job are transferred from the work-in-process inventory to the finished goods inventory. Process costing affects financial statements in a couple of ways. Raw materials are assigned based on material requisition forms; labor is based on time tickets, and overhead costs are based on a predetermined rate. Journal entries process the transfer from inventory accounts, going from work-in-process to finished goods to the cost of goods sold.
Edmonds, T. (2020). Fundamental Managerial Accounting Concepts. McGraw Hill.

To compare job-order and Process costing systems, we need to understand their differences. When using job-order costing, you can track the costs of an individual project, and it is best used for small batches and custom orders. When using process costing, you are looking at the total production of products and best used for mass production of identical or very similar products.
Costing refers to the calculation of expenses such as materials, labor, and overhead. Materials and work can be accounted for specifically for an individual job or product, while overhead is an allocation or portion of the company’s operation costs. Overhead includes fixed costs like rent and utilities as well as administrative costs to run the business, like HR and accounting department costs.
An impact on financials in the job-order Process could occur if there is a change to the order. For example, if a custom order for shoes is accepted and priced, but during production, the scope changes. The price that was quoted would need to change, and the manufacturer would need to determine the new pricing for raw materials, labor, and overhead allocation. If the order change did not impact cost, the price quoted could remain the same. Job-order processing for a service would be similar. If an accountant was hired to complete a simple tax return and had mentioned the price based on hours to complete, and that changed due to the complexity of the return, the cost of the job would need to be adjusted.
When using process costing, a financial impact could occur at any stage in production. If production is delayed due to labor shortages, that could drive up costs, or overtime is needed to get the job done. The length of time to produce the product is part of the cost analysis; therefore, any change to that impacts expenses. Another impact could be in overhead allocation. If the company has to add more staff to its HR or accounting department, the budget could go up and, therefore, impact the expected profit.
Each system has its advantages and disadvantages, so a company needs to find the costing system that works best for