managerial accounting
Q1: There are two different types of cost accounting systems: Job order cost systems and process cost systems. How does management decide whether to use a job order cost system or a process cost system in any given manufacturing situation? Explain.
Job order cost system is used in situations where many different products are produced each period. For example, a Levi Strauss clothing factory would typically make many different types of jeans for both men and women during a month. A particular order might consist of 1,000 stonewashed men’s blue denim jeans, style number A312. This order of 1,000 jeans is called a job. In a job-order costing system, costs are traced and allocated to jobs and then the total costs of the job are divided by the total number of units in the job to arrive at an average cost per unit.
Process cost system used in companies that produce many units of a single product for long periods. Examples include producing paper at Weyerhaeuser, refining aluminum ingots at Reynolds Aluminum, mixing and bottling beverages at Coca-Cola, and making wieners at Oscar Mayer. These are all homogeneous products that flow through the production process on a continuous basis. Because all units are the same, each unit produced during the period is assigned the same average cost. This costing technique results in a broad, average unit cost figure that applies to homogeneous units flowing in a continuous stream out of the production process.
To decide whether which costing system should be applied, it is depends on that organization itself. If that organization is producing products like clothing, repair shops and hospitals, so they have to use a form of job-order costing. These companies have readily identifiable raw material costs that apply directly to each unit produced or serviced. Labor is also identifiable to each product because of the differences in the products produced. Most companies use job-order costing because of the various products they produce
Job order cost system is used in situations where many different products are produced each period. For example, a Levi Strauss clothing factory would typically make many different types of jeans for both men and women during a month. A particular order might consist of 1,000 stonewashed men’s blue denim jeans, style number A312. This order of 1,000 jeans is called a job. In a job-order costing system, costs are traced and allocated to jobs and then the total costs of the job are divided by the total number of units in the job to arrive at an average cost per unit.
Process cost system used in companies that produce many units of a single product for long periods. Examples include producing paper at Weyerhaeuser, refining aluminum ingots at Reynolds Aluminum, mixing and bottling beverages at Coca-Cola, and making wieners at Oscar Mayer. These are all homogeneous products that flow through the production process on a continuous basis. Because all units are the same, each unit produced during the period is assigned the same average cost. This costing technique results in a broad, average unit cost figure that applies to homogeneous units flowing in a continuous stream out of the production process.
To decide whether which costing system should be applied, it is depends on that organization itself. If that organization is producing products like clothing, repair shops and hospitals, so they have to use a form of job-order costing. These companies have readily identifiable raw material costs that apply directly to each unit produced or serviced. Labor is also identifiable to each product because of the differences in the products produced. Most companies use job-order costing because of the various products they produce
References: Guy, Q. (2011, February 7). Cost of Quality Basics (CoQ) | Cost of Quality. Retrieved November 26, 2014, from http://www.costofquality.org/cost-of-poor-quality-basics/ Kootanaee, A. J., & Babu, K. N. (2013, March 1). Just-In-Time Manufacturing System: From Introduction to Implement by Akbar Javadian Kootanaee, K. Nagendra Babu, Hamid Foladi Talari :: SSRN. Retrieved November 26, 2014, from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2253243 Quality costs - Prevention, appraisal, internal and external failure costs | Accounting for Management. (2013, November 28). Retrieved November 26, 2014, from http://www.accountingformanagement.org/costs-of-quality-or-quality-costs/ Schmidt, M. (2014, November 16). Activity Based Costing ABC Management Explained, Calculated Examples. Retrieved November 27, 2014, from https://www.business-case-analysis.com/activity-based-costing.html Vitez, O. (2014, July 3). Process Costing Vs. Job Order Costing | eHow. Retrieved November 26, 2014, from http://www.ehow.com/about_5389912_process-vs-job-order-costing.html