Job Order versus Process Costing Techniques - Research Paper Example

?Job Order versus Process Costing Techniques Introduction Costing is one of the counting techniques used by companies’ manufactures goods and services to ascertain the labor, material expenses, and overheads incurred in operations. This is very crucial costing enables a company to know with certainty the materials needed, labor requirements and the overheads incurred for planning purposes. Costs are first accumulated after which they are assigned to products and services. Job-order and process costing are the two main product costing techniques usually employed for accumulating and assigning costs to services and products. Process costing, according to Finkler, Ward, and Baker, are a costing technique, which involves assigning all units produced within a given period to the same cost (34). Job-order costing, on the other hand, is a costing system that ascertains separately the costs incurred for producing the units for each job (Finkler, Ward, and Baker 34). The two costing techniques have certain differences, which makes them suitable for certain companies and not in others. This paper seeks to explore the differences between job-order and process costing systems. In so doing, the paper will highlight why one of the costing systems will be preferable for use over the other. Finally, the essay will explore companies that can effectively use the two systems based on the analysis of the differences between the two costing approaches. To begin with, before assigning costs to products and services, it is always necessary to accumulate the costs involved in the operation. This ensures that the company effectively determines all the overheads, labor, and material expenses involved in the operation. The two systems have several differences that distinguish one from the other. Firstly, in job-order costing system, jobs are given varying degrees of attention and skills from each operation or production department (Kinney and Raiborn 207). In contrast, in process costing system, the out-put units produced are given equal attention from each operation or production department. Secondly, in process costing system, costs are identified with the units of works done during a given period. In contrast, in job-order costing system, costs are identified with a specific job performed. Thirdly, in job-order costing system, costing is done to meet specifications of individual customers. This implies that products and services are produced in line with the requirements of a given customer. Therefore, in the job-order system, production is normally preceded by sales. In contrast, in process costing system, sales are preceded by production since production is for generating inventories for future sales. Therefore, under process costing system, there is no need of attempting to identify labor, material, and overhead costs with the specific orders made by customers. This is because each order forms just one of the many filled from a continuous flow of almost identical units from the line of production. Therefore, in process costing, costs are accumulated by departments, but not by orders, which are then assigned uniformly to all units passing through the department during a specified time. According to Finkler, Ward, and Baker, costs are not accumulated using job cost sheets (Oliver 56). Fourthly, the two costing systems differ in accordance with how the unit costs are determined during operation. In this regard, in the job order costing system, unit costs are ascertained continually as soon as each job is completed. Process costing system, in contrast, involves periodic determination of unit costs. Additionally, in job-order costing system, material required for jobs depend on the order received. As such, the stock held is small in job costing. In process costing, on the other hand, materials required for output are known with certainty. Therefore, the material stock kept on hand tends to be higher than the job-order costing. In addition, most jobs, in job-order costing are directly traceable to other jobs, implying that a major portion of total costs made of direct costs. In contrast, in process costing system, mechanization of operations is feasible largely involving higher overhead costs. Further, whereas in job-order costing, production time is relatively short because the number of units produced every time relies heavily on orders received, production in process costing system is usually done on a large scale, involves long production runs, which are also continuous. Finally, in job-order costing, unit costs as calculated on the job cost sheet whereas, in process costing system, costs are computed by department (Oliver 56). Based on the features of the two costing techniques, it becomes apparent that there are certain companies and jobs that suit job order costing system or process costing system. In this regard, job-order costing will be appropriate for use for a cobbler making custom boots and shoes an accountant filing tax returns and a publishing company dealing in publishing of magazines, newspapers, and textbooks. Other areas of use effective include a research company involved in product development studies and an architectural company designing commercial buildings. The suitability of job-order costing system to these organizations is because these companies make relatively small quantities of specific products. In addition, these organizations also perform peculiar services that match the requirements designated by the clients/customers (Weygandt, Kimmel, and Kieso 38). In contrast, the process costing system will be preferable for use by firms making large quantities of homogenous goods such as detergents, bricks, candy bars and gasoline just to name but a few (Weygandt, Kimmel, and Kieso 38). Therefore, job order costing system will be used in companies producing products that consume different amounts of inputs. On the other hand, it will be highly appropriate to use process-costing system when all products consume the same inputs, as is the case in soft drinks (Kinney and Raiborn 207). Washington-based companies that would use both job-order and process costing systems Certainly, the differences notwithstanding, process and job-order costing systems are not entirely exclusive. This implies that a company need not just confine itself to the implementation of either job or process costing systems, according to Oliver (59). In this regard, Jain suggests that a firm can effectively adopt both methods to accomplish cost information needs. For example, automobile manufacturing firms are a classical example of companies that can effectively adopt process costing system in their main assembly lines and job costing in their engineering department. ALTEK Manufacturing is one of companies based in Washington State that would use both costing systems in its manufacturing processes. ALTEK Inc. is a full-service manufacturing firm that offers custom manufacturing services for aerospace, industrial, and medical manufacturing (Martin par.6). In this regard, ALTEK Inc. will employ job-order costing system in its engineering department because different inputs are required in this department. In addition, job costing will be used in the engineering department where costs need to be determined as soon as the job is completed (Martin par.6). At the same time, since ALTEK has the assembling section for aerospace, the company will be justified in using the process costing in its assembling line where costs are determined periodically. Additionally, process costing will be employed in the company’s assembling departments since it allows cost accumulation by department. Since ALTEK Inc. also manufactures heavy equipment such as medical and industrial equipment, it will employ job-order costing system in determining the total cost of large machines. However, the costs machine components produced in large quantities such as valves, switches among others would require the use of process costing system first. Conclusion Job-order and process consisting systems are some of the major product costing systems for accumulating and assigning costs to products and services. The two methods, however, differs significantly from each other making their areas of implementation different. Nevertheless, it also came out that, despite the differences, the two methods can as well be used together in some firms such as in the automobile firms and large manufacturing companies. Works Cited Finkler, Steven A., David Marc Ward, and Judith J. Baker. Essentials of cost accounting for health care organizations. Upper Saddle River, NJ: Jones & Bartlett Learning, 2007. Print. Kinney, Michael R., and Cecily A. Raiborn. Cost Accounting: Foundations and Evolutions. New York, NY: Cengage Learning, 2010. Print. Martin, Kathleen. “ALTEK Manufacturing.” Web. 29 May 2013 http://www.manta.com/c/mm251rz/altek-manufacturing. Oliver, Lianabel. The Cost Management Toolbox: The Manager's Guide to Controlling Costs and Boosting Profits. Oxford, NY: AMACOM Div American Mgmt Assn, 2000. Print. Weygandt, Jerry J., Paul D. Kimmel, and Donald E. Kieso. Managerial Accounting: Tools for Business Decision Making. Hoboken, NJ: John Wiley & Sons, 2009. Print. Read More