Its cost data are collected via a job order cost system, which is designed to allow for individualized products or services. In the case of a not-for-profit company, the same process could be used to determine the average costs incurred by a department that performs interviews. The department’s costs would be allocated based on the number of cases processed. For example, assume a not-for-profit pet adoption organization has an annual budget of $180,000 and typically matches 900 shelter animals with new owners each year.
Jennifer – Job Costing System
In these circumstances, the individual costs are easy to trace to the individual jobs. While still in production, the work in process units are moved from one department to the next until they are completed, so the work in process inventory includes all of the units in the shaping and packaging departments. When the units are completed, they are transferred to finished goods inventory and become costs of goods sold when the product is sold. Job order costing is a costing system used to calculate the costs incurred to complete an individual job or order. In a business that employs a job order costing system, each specific job or order is assigned a unique job number to distinguish it from the others. The last two types of production in use process costing methods described in another chapter, so we give just a brief overview here.
Direct or Indirect Material
Overhead is applied to each product based on an activity base, which will be explained in Compute a Predetermined Overhead Rate and Apply Overhead to Production. Job order costing is an accounting system that traces the individual costs directly to a final job or service, instead of to the production department. It is used when goods are made to order or when individual costs are easy to trace to individual jobs, assuming that the additional information provides value.
2: Compare and Contrast Job Order Costing and Process Costing
If you manufacture face masks, you can calculate the amount of each fabric (raw materials) you use in each mask for direct materials and the direct labor costs it takes to run the machines. 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.
The next picture shows the cost flows in a process cost system that processes the products in a specified sequential order. That is, the production and processing of products begin in Department A. From Department A, products go to Department B. Department B inputs direct materials and further processes the products. On a monthly basis, if you use job costing review each completed job and compare the budgeted cost to your actual cost. If you use process costing review your cost by batch instead of individual job. Process costing and job order costing are both acceptable methods for tracking costs and production levels. Some companies use a single method, while some companies use both, which creates a hybrid costing system.
Job order systems are custom orders because the cost of the direct material and direct labor are traced directly to the job compare and contrast job order and process costing systems being produced. There are two methods used to compute the values in the work in process and finished goods inventories. The first method is the weighted-average method, which includes all costs (costs incurred during the current period and costs incurred during the prior period and carried over to the current period).
Manufacturing Costs
For example, it would be impossible for David and William to trace the exact amount of eggs in each chocolate chip cookie. It is also impossible to trace the exact amount of hickory in a drumstick. Even two sticks made sequentially may have different weights because the wood varies in density. Manufacturing departments are often organized by the various stages of the production process. Each department, or process, will have its own work-in-process inventory account, but there will only be one finished goods inventory account.
- Technology makes it easy to track costs as small as one fastener or ounce of glue.
- Manufacturing overhead is another cost of production, and it is applied to products (job order) or departments (process) based on an appropriate activity base.
- If a customer orders a custom-made suit, the specific fabric, detail of any special features, and the time involved in sewing are all factors that will determine the total cost and, therefore, the selling price of the garment.
- Each part of the vehicle is mass produced, and its cost is calculated with process costing.
If Jennifer finds that job A required more labor hours than job B, it makes sense to assign more overhead costs to job a because it took more effort and therefore should be assigned more costs. Though it’s not a perfect allocation, it’s an accepted approach many companies use. The batches are a little different, and the manufacturer makes slight adjustments to switch between products. The cost to change machine settings and to move in different materials – such as a different type of fabric – is factored into the overhead cost for each product.
For example, assume a not-for-profit pet adoption organization has an annual budget of \(\$180,000\) and typically matches 900 shelter animals with new owners each year. Process costing can also accommodate increasingly complex business scenarios. While making drumsticks may sound simple, an immense amount of technology is involved.
Jobs v. Processes
Understanding the differences between job order and process costing will help you make informed decisions and ensure your costing strategy aligns with your business model. To implement her process costing system, she computes the cost per specific unit produced. The majority of companies produce more than one product, and they use process costing by making batches of identical products, or at least highly similar products. 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.
Jennifer owns and operates AAA Lawn Services, a business that provides landscaping and lawn care services.
PRODUCT
In this example, two groups—administrative and manufacturing—report directly to the chief financial officer (CFO). The organizational chart also shows the departments that report to the production department, illustrating the production arrangement. The material storage unit stores the types of wood used (hickory, maple, and birch), the tips (nylon and felt), and packaging materials. In job order cost production, the costs can be directly traced to the job, and the job cost sheet contains the total expenses for that job. Process costing is optimal when the costs cannot be traced directly to the job.
When an employee pulls a new roll of cotton fabric from the shelf to make the shirts (using first in first out, or FIFO to ensure the oldest materials are used first), the cost has to be moved out of material control and into work in process. Accountants use control accounts to track the cost to go into the manufacturing process. Look at the expense categories and note each overhead cost and the amount spent before.
- The chart below shows how various companies choose different accounting systems depending on their products.
- There are no individual or separate job orders in a process costing system.
- Therefore, the costs are maintained by each department, rather than by job, as they are in job order costing.
- When a company mass produces parts but allows customization on the final product, both systems are used; this is common in auto manufacturing.
- We saved more than $1 million on our spend in the first year and just recently identified an opportunity to save about $10,000 every month on recurring expenses with PLANERGY.
- What would happen, if down the line, they decide to do special custom planners for different customers?
While companies may choose different cost accounting systems, each system must be capable of accumulating the costs incurred and allocating the costs to the product. 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. The choice of cost accumulation system depends on the variety and type of products or services sold, or the type of manufacturing processes employed.
Each job is different, depending on the size of the home, whether or not the items are packed ahead of time or to be packed in advance of the move, and the distance between homes. We saved more than $1 million on our spend in the first year and just recently identified an opportunity to save about $10,000 every month on recurring expenses with PLANERGY. Dedicated to keeping your business finances operating smoothly so you can focus on your business. Textbook content produced by OpenStax is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike License . The OpenStax name, OpenStax logo, OpenStax book covers, OpenStax CNX name, and OpenStax CNX logo are not subject to the Creative Commons license and may not be reproduced without the prior and express written consent of Rice University.