The process of job order costing seeks to approximate the cost of production for various jobs included in particular customer orders. Inside various organizations, taking each job as a single output or when various products are produced in a given time, this kind of costing is the most appropriate (Kaplan, 2005). Labor hours, materials as well as machine hours vary according to products and from one customer order to the next. It may also vary further in the need that is inherently put on manufacturing overhead. An example of job or customer order is the customized production. Such order might use huge support resources compared to the general process of production. If the manufacturing companies were to come up with a computer chip patented and designed by another company, it may need some re-engineering process; use of sources not used in general production process, or even more elements of change like different product logo among others. In such instances, management would need to be sure that particular order gives the impression of all related costs otherwise the cost product information will not be accurate. In the case where the company is making various types of computer chips in a specified period, employment of the job order costing process would also be relevant as management would need to fully recognize the real costs incurred by each particular product (Horngren, 2006).
The major differences between job order and process costing arise from two main factors. First and foremost, the movement of units in the process costing system is a continuous one and secondly is that the same units cannot be differentiated from one another. Under the process costing, it makes no point to attempt to look for labor, materials as well as the overhead costs in a given order from the consumer as it is done in the jo9b order. Because each order is just one among many that are filled from a continuous movement or virtually identical units originating from the production line. In process costing, there is accumulation of costs by the specific department rather than by the order, give these costs similarly to all the units that pass by the department in the same period. These differences are just few among many and give us the basic differences between the two terms to bring out a clear understanding (Keller, 2007).
By keeping correct production costs records in an organization making various products becomes more complex when rated to an organization that make only one product. Various products made will eventually incur various costs and take in the organization resources varying degrees, needing a separate product cost or job cost records to correctly manage for efficient process (Dutta, 1998). Using the job cost sheet to look for each job, or the consumer order, the job order costing process uses a theory just like an inventory theory to keep detailed records of all the job orders related to the costs starting with raw inventory sources, to work in system inventory, through finished products (Mohd, 2010). Once the products are finalized and sold to consumers, the expenditure is recorded as costs of goods sold. This particular job information is particularly beneficial to management when it comes to request on or giving a quote to offer a product at a certain specific volume, or how customized process of production will affect the costs for both the organization as well as the customer (Williamson,1976).
With coming up of the latest computer memory chip, a bill of sources will be needed to show all the necessary direct sources required for the completion of one unit. The bill of sources gives a starting point whereby it gives costs as well as pricing information compared to a particular order. As perspective costs are met, a production order is given and the source requisition form gives particular amounts and types of direct sources needed and further give the information which job the various sources will be charged to (Williamson, 1976). The aim of the materials requisition form is not only to make sure that the materials are charged and also recorded on the right job order cost sheet but also to control the distribution of materials to production. Direct labor is managed in a similar way, labor charges that are allocated easily to a particular order are recorded on the job paper and charged to the relevant order. The labor charges that are not easily contributable to a particular job become a section of manufacturing overhead. Each and every worker’s records segregate all the hours by certain tasks making sure that the correct costing information through the job and giving the necessary financial information for the future estimations and planning (Garrison, et al).
Overhead charges are a bit complex in the process of allocation, because such charges are not usually direct. The fact that overhead costing remains relatively constant further complicates the removal correct costs. Also, the overhead costs consist of various personal activities like labor and supplies required for the maintenance of industrial equipment or the supervisory compensation. The allocation of overhead costs needs determination of allocation ground or the cost driver. Cost driver is a job related quantitative item that propels the overhead cost. The major variable element is the cost driver when it comes to the production that affects the costs (Horngren, 2006). In cases where the aid for a direct labor takes the majority of overhead costs, the direct labor hours would usually be used as the propelling factor (Crosson, 2007). However, in cases where the product design, machine hours or engineering take the majority of overhead costs linked with a particular job or customer order, then the items would be seen respectively as cost drivers. A predetermined rate reflects the total production costs divided by the approximated costs of allocation ground, or cost driver. This gives only an approximate for the period, and averaged further to match with each job order by dividing the predetermined overhead rate by the real amount of allocations base spent in a given order (Winicur, 1993). Once the job sheet is done away with, all the direct labor, materials as well as manufacturing overhead are taken relevantly, according to the cost of the product calculated by dividing the total job cost as seen on the job sheet, by amount of items produced (Winicur, 1993).
When one particular product is made in large amounts for a long period of time, the cost of processing is a more correct choice as a product costing process. Just the same way as the job order system, the process costing system serves to give a per unit, or product pricing based on direct costs and the manufacturing overhead. Various products that are produced in bulk are sold to individuals in large amounts, thus a small change in unit coast major total cost change, making relevant cost per unit distribution imperative to planning, pricing as well as controlling costs (White, 2006). The process of costing is the same as job order costing in the sense that the cost per unit is obtained by the division of all the manufactured costs by all the units made. Process costing only does this for a particular given product over a specified period of production while job costing does it over the life of a particular job order. The same main manufacturing expenses are used in processes, direct labor, materials and the manufacturing overhead, and include just the same inventory accounts, work in progress, raw materials and the finished products. Even though similar costs information is utilized, process costing lacks the use of specifying individual orders and gives units costs by section or department (Baker, 2005).
The process of manufacturing is associated with one product in production of a given broken down into various departments. The number of processes needed to make a particular product is not relevant, because the activity in each process is applied to all the units in an identical manner. The costs which are incurred during the production process are traced back to different process sections in contrary to various job orders, making the process of cost tracking less complex compared to what takes place in the job order costing process (Ward, 2000). Each section has its own work in process account and completed products which leave one department in the entire manufacturing process. Both indirect and direct costs can be put in at any given time at any processing unit to give the total cost information and to gauge the proceedings (Garrison et al).
A materials form is also utilized in the process of costing to get materials for production and keep a record of direct material pricing as well as direct working hours are tracked to particular production departments. The predetermined overhead rates, just like the ones used in job costing, are mainly applied in processing in each production unit as the product moves in the manufacturing process. On completion of the product, it passes all the sections and finally ends up as finished product and piled expenses are charged to cost of sales (Finkler, 2007).
The cost unit cannot be deducted from each department’s piled production costs without determining the output of the product per production unit. Different departments typically posses units that are still under the process of manufacturing, thus the accurate per unit information cost will require effective count for all the units (Mowen, 2007). The value that is used to represent the product of incomplete units and their relevant percentage of completion is referred to as the equivalent units. The figure for the equivalent units represents the number of units that could have been finished from the materials and assembled in a partial manner at a particular time of cost allocation or calculation. The same figure can be obtained in various ways; through multiplication of the partially completed number using their percentage of completion or using the weighted aggregate method. Once the cost per equivalent is calculated, the same costs makes up the number of units in ending inventory and units in transfer between various production sections. Equivalent units are multiplied by the price of equivalent unit and allocated in every inventory cost class (Kiesso, 2009).
Just like all the managerial accounting system considerations, the main aim is to add more value to the company and its processes, and the choice of product coasting process must suit the added value principle. The significance of the support and materials needed by every choice in costing system will play a major role in the final decision making process.
