Question

The computer workstation furniture manufacturing that Santana Rey started for Business Solutions is progressing well. Santana uses a job order costing system to account for the production costs of this product line. Santana is wondering whether process costing might be a better method for her to keep track of and monitor her production costs.

1. What are the features that distinguish job order costing from process costing?

2. Should Santana continue to use job order costing or switch to process costing for her workstation furniture manufacturing? Explain.

Answer 1

Answer for (1)

In job costing, the production costs are attributed to specific products or group of products. Whereas in the case of process costing, homogeneous products are obtained after different processes and the entire cost incurred for production is allocated among each individual product.

Main features that distinguish job order costing from process costing are:

Nature of product: Job costing suits for exclusive or unique products whereas process costing is best applicable in case of homogeneous products.

Quantum of production: Job costing is suitable for small production runs. On the other side, for large quantity of production process costing is the choice.

Cost data recording : Since the materials, labor and other production expenses are chargeable to specific jobs, keeping records is relatively more in job costing as compared to process costing where costs are aggregated costs and hence requires less record keeping.

Billing: Under Job costing, entire cost for production is charged from customers under one bill for the projects commissioned by them.

Answer for (2)

Method of costing should be adopted on the basis of nature of production & type of the product. In this case, if workstation furnitures are custom made according to the needs of the customers then job costing is the proper choice and hence Santana shall continue to use job order costing.