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Managerial Accounting

Costing Systems: Job Order and Process Costing


Chapter 17

I. Job order costing Vs. Process Costing

Product Costing System:


A set of procedures used to account for an organization’s product costs and provide with timely and accurate
unit cost information for pricing, cost planning and control, inventory valuation, and financial statement
preparation.

There are two basic systems:


1. Job order costing system
Used by:
 Manufacturers of large equipment
 Unique items
 Made to order

Examples:
Made to order furniture, made to order draperies, specialty cars etc.

What is a job order?


A specific number given to the product order

2. Process costing System


Used by
 Companies that produce large amounts of similar products in a continuous flow
Example:
Paint, bricks, milk, paper, etc.

In-Class E2

II. Job Order Costing in a Manufacturing Company


The costing process begins typically with a purchase order.

Direct Materials are then move from Storeroom into the production process.

Direct Labor is accumulated in the Work in Process Account using the data of the time cards

Indirect Labor is charged to Manufacturing Overhead account

Indirect Materials is charged to Manufacturing Overhead account

Other Indirect Cost is charge to Manufacturing Overhead such as Electricity, Depreciation, and Insurance.

The Manufacturing Overhead Account is debited as costs are incurred. As the product is being finish an applied
overhead rate, previously calculated, is used to estimate Overhead. At the end of the year Actual manufacturing cost
and applied cost are reconciled and the differences are recorded in the Cost of Good Sold.
Chapter 17 1 Author: Anna Rovira Beavers
Needles 2008 8/6/07
In-Class E4

A. The Job Cost Card and Computation of Product Unit Costs


Job Order Cards are used to accumulate and trace the cost for an order. See example below:

Job Order :
JOB ORDER COST CARD
Augusta, Inc.
Spring Hill, Floridia
Customer: ____Stock_________ Batch: ______X_________

Specifications: _Two General-purpose golf carts


Date of Order: 2/26/XX_______________________________________________

Date of Completion: ____3/6/XX____________________________________

Cost Charged for the Job Previous Months Current Month Cost Summary
Direct Materials $165 $1,035 $1,203
Direct Labor 127 1,320 1,447
Overhead 108 1,122 1,230
(85% of direct labor cost)
Totals $400 $3,480 $3,880
Units Completed 2
Product Unit Cost $1,920

In-Class E6

III. The Process Costing System

The process costing system is use by companies that produce large amounts of similar products or by companies that
have a continuous production flow. Such as water, soda, candy bar production, etc.

Characteristics of a process costing system:


1. Cost of materials, labor and manufacturing overhead are first traced to processes, departments, or work cells.
2. The cost is then assigned to the products produced by those departments.

A. Patterns of Product Flows and Cost Flows


During production, product flow through several departments. Direct Material and Direct Labor are accumulated in
each department and passed to the subsequent department.

Let’s say that a water bottling company has 3 departments:

Department 1: Sterilization
Department 2: Fill
Chapter 17 2 Author: Anna Rovira Beavers
Needles 2008 8/6/07
Department 3: Cap and Label

The cost of sterilizing plastic bottles (labor, materials and overhead) will move into the Fill Department where the
additional labor and materials will be added and a portion of the manufacture overhead assigned to that department. As
the bottles are filled they move to the Cap ad Label department where additional labor, materials, and overhead will be
added. Once the process is complete the finished products moves to the shipping location and it is recorded in the
Finished Goods Inventory .

As we can see the cap and label department will contain the cost of all departments.

Sterilization Fill Department Cap and Label


Department Cost moves to the Department
Cost moves to the Cap and Label Cost moves to
Fill Dpt. Dpt. Cost of Good Sold

Cost are accumulated using


Assigning cost to a process costing systems is challenging since the beginning of the production cycle. Accountants
need a system to know how many actually units were produced at month end to assigned cost. Materials are put in the
production cycle and the end of the month some units may be partially done but not completed. The challenge is to
assigned cost to these units since labor and materials have been used even though there are partially completed. Two
methods are most used:

1. FIFO costing approach


The cost flow follows a logical flow of production, and the costs assigned to the first materials processed
in a department are the first costs transferred out when those materials flow to the next department.

2. Average costing approach


An average cost is assigned to all products made during an accounting period. This method links cost
production to the accounting cycle to the flow of production.

B. Computing Equivalent Production


One of the key elements of a process costing system is the computation of equivalent units of production for each
process, department, or work cell for each accounting period.

Equivalent Units:
The measure of the number of equivalent whole units produced in a period of time. Partially completed units are
restated in terms of equivalent whole units.

What does Equivalent Units Include?

1. Units in the beginning inventory. (These are units that were not completed the previous month)
2. Units started and completed during the period
3. Units not completed the current month.
Chapter 17 3 Author: Anna Rovira Beavers
Needles 2008 8/6/07
C. The Process Cost Report
A process cost report consists of three parts:

1. Schedule of equivalent units of production


 Beginning inventory – materials used for units completed in the current period.

 Units started and completed - Ending inventory units started but not yet completed in the period.

Physical Units
Beginning Inventory 1.00
Units started this period 4.00
Units to be accounted for 5.00

Direct Materials Conversion Costs


Beginning Inventory 1.00 0 0% .50 50%
Units Started and Completed 3.00 3.00 100% 3.00 100%
Ending Inventory 1.00 1.00 100% 0.75 75%
Units Accounted for 5.00 4.00 4.25

In-Class SE7, E10

D. Preparing a Process Cost Report Using the FIFO Costing Method


A process cost report is used by managers to track and analyze cost for a process, department, or work vell in a
process costing system. In a process cost report that used FIFO costing method, the cost flow follows the logical
physical flow of production.

See page 887 in your textbook for a complete Process Cost Report.

In-Class SE8, SE9, P4

Homework Assignments for Chapter 17: E5, E11, E13, E14, P5

Chapter 17 4 Author: Anna Rovira Beavers


Needles 2008 8/6/07

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