Financial and Managerial Accounting

Business

Quiz 18 :
Process Costing

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Quiz 18 :
Process Costing

A company chooses job order costing or process costing accounting system for a product or service, depending on its type and nature. Job order costing: Job order costing is a system for assigning manufacturing costs to batches of products or an individual product. Job order costing is used only when the products manufactured are different from each other. Process costing: Process costing is a type of operation costing which is used to ascertain the cost of a product at particular process or stage of manufacture. Process costing is appropriate for the companies that produce a continuous mass of identical units, through a series of operations or process. a. Job order costing system is appropriate to C.E Sons, Inc. as it is a construction company with multiple job sites. The particular construction cost is determined by using job order costing. b. Job order costing system and process costing system both are appropriate to 'A' Computer as it is a computer manufacturing company. It manufactures computers to the individual and institutional clients. c. Job order costing system is appropriate to 'PWS' Inc. as it is a manufacturing company. It receives orders from the parks and schools. Accordingly it delivers the equipment. Each order is considered as job order. d. Process costing system is appropriate to 'S' Industries. It manufactures injection molded plastic doghouses. The manufacturing is carried out through various processes. e. Process costing system is appropriate to 'NMNP'. It produces vitamins and nutritional supplements through a series of process.

Mr. Brown: Thank you for your recent memo. I am glad to see that you have become familiar with our cost accounting methods and have constructive suggestions. You are correct that we could use job order costing and, also, that we could base our unit cost computations upon equivalent units, rather than upon units completed. But let me explain briefly why we are currently doing what we do. I will first address our use of process costing. It is true that our beer is brewed in batches, which could be identified as jobs. But once the beer is bottled, the concept of the batch becomes insignificant. As we produce only one line of beer, we would not charge a different price nor record a different cost of goods sold based upon the batch from which particular bottles came. Thus, information about the costs of different batches would serve little purpose. What we really need is information about the per-unit cost of various brewing processes. This enables us to quickly identify the causes of changes in our total unit cost. Next, we assign all manufacturing costs to units completed during the period because it is more convenient than computing equivalent units, and produces essentially the same results. If you compute our equivalent units, you will find this measurement to be nearly identical to the number of bottles produced. Given that we have a substantial amount of work in process in our fermenting tanks, you may ask, Why The answer is that we always have the same quantity of beer in our fermenting tanks. As the amount of our work in process does not change from month to month, our productive effort is essentially equivalent to the amount of finished product coming off our bottling line. Please do not be discouraged by my response to your suggestions. You are observant and have ideas-that's what we need from our cost analysts. If we begin brewing a variety of specialty beers, we may well adopt your suggestion of job order costing.

Cost accounting systems: 1) provide employees with information useful in managing activities that consume resources, 2) furnish managers with information to evaluate and reward performance, and 3) provide information necessary for external reporting requirements such as inventory valuations and cost of goods sold. Multiple cost systems are used in different parts of the organization for different processes and needs of management.