4 2: Comparison of Job Costing with Process Costing Business LibreTexts

According to thecompany, more than 11,000 of its soft drinks are consumed everysecond of every day. Take self-paced courses to master the fundamentals of finance and connect with like-minded individuals. We need just process costing a bit more info from you to direct your question to the right person. A financial professional will offer guidance based on the information provided and offer a no-obligation call to better understand your situation.

Steps in process costing system

However, since the production process takes three weeks to complete, all the units produced in the last half of March will be in WIP inventory at the end of March. Recall that Desk Products, Inc., has two departments—Assembly and Finishing. Although this chapter focuses on the Assembly department, the Finishing department would also use the four steps to determine product costs for completed units transferred out and ending WIP inventory. Table 3.2 “Production Information for Desk Products’ Assembly Department” presents information for the Assembly department at Desk Products for the month of May. Review this information carefully as it will be used to illustrate the four key steps.

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This means that in this process costing system example, the company incurred a total cost of $150,000 for the 150,000 reams of paper that it produces. Hence, the cost per unit will be calculated as $1 (total cost of $150,000/150,000 reams of paper). As one of the process costing system examples, let’s look at a supposed company, ABC Inc, that produces wire rods, that pass through multiple production departments. Companies that mass produce a product allocate the costs to each department and use process costing. For example, General Mills uses process costing for its cereal, pasta, baking products, and pet foods. Job order systems are custom orders because the cost of the direct material and direct labor are traced directly to the job being produced.

Direct Materials

For example, managers using this system can assess profit margin by product and isolate problem products before they become major issues. Process Costing also allows companies to set prices according to production costs. 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 https://www.bookstime.com/ 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. Later in step 3, we will use equivalent unit information for the Assembly department to calculate the cost per equivalent unit. A new competitor recently began producing a similar desk, and Ann is concerned about whether Desk Products’ production costs are reasonable.

2 Product Cost Flows in a Process Costing System

• In determining a price point, you must first have a handle on your company’s material and labor costs, as these are both the direct and variable costs required to produce a given item.
• LIFO establishes that the newest layers of inventory (based on received date or manufacturing date) are used up before the older layers.
• Process costs are expensed as incurred; job-order costs are capitalized.
• Since the products are very similar in nature, different departments specialize in different processes.
• It is difficult to tell the first drumstick made on Monday from the 32,000th one made on Thursday, so a computer matches the sticks in pairs based on the tone produced.

The purchasing department is charged with coming up with the standard rates for purchasing related activities. This type of costing is used primarily by Make-To-Order (MTO) production environments. In this environment, direct costs are easily attributable to a product, and if a manufacturer has good control on their variable and overhead costs it can yield very accurate quoting/pricing.

As a result, job costing or direct costing may be a justifiable approach. The advantage to standard costing is that manufacturers can produce goods to a set of standards and when actual rates or duration vary they can be monitored and compared by analyzing variances recorded at the production level. Standard costing allows manufacturers to examine trends and make the appropriate modifications to their standards as needed which helps with accurate pricing decisions.

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Step 2 of 3

• This rate is used to charge the factory overhead to the jobs worked on during the month.
• I have a small shop where my use of one method of costing (method-A) results in a very accurate cost analysis to determine pricing, but it takes three people working 20 hours per week to establish those rates.
• A process costing system accumulates costs and assigns them at the end of an accounting period.
• If there is a difference between the actual direct labor cost and the amount charged to production in the period, the difference can be charged to the cost of goods sold or apportioned among the units produced.
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