Question

When are companies likely to use a job costing system or process costing system? Describe the specific characteristics of each system and provide at least 2 examples from companies in your community for each system (at least 4 companies should be described).

Answer 1

Job costing involves the detailed accumulation of production costs attributable to specific units or groups of units. For example, the construction of a custom-designed piece of furniture would be accounted for with a job costing system. The costs of all labor worked on that specific item of furniture would be recorded on a time sheet and then compiled on a cost sheet for that job. Similarly, any wood or other parts used in the construction of the furniture would be charged to the production job linked to that piece of furniture. This information may then be used to bill the customer for work performed and materials used, or to track the extent of the company's profits on the production job associated with that specific item of furniture.

Process costing involves the accumulation of costs for lengthy production runs involving products that are indistinguishable from each other. For example, the production of 100,000 gallons of gasoline would require that all oil used in the process, as well as all labor in the refinery facility be accumulated into a cost account, and then divided by the number of units produced to arrive at the cost per unit. Costs are likely to be accumulated at the department level, and no lower within the organization.

Characteristics of Job Costing

1.    Each Job distinguishable
Each job can be clearly distinguishable from other jobs. Each job is given a unique Job number, which clearly distinguish that job from other jobs performed by the organization.
2.    Customer Specific
Job costing is used, where job is performed at the request of the customer. Each job is performed as per specific requirement of customer.
3.    Job Price
Job price is agreed with customer on the bases of cost estimation. An appropriate percentage is added to the cost for quoting a price to the customer.
4.    Separate Record
Separate record is kept for each job. This record is handy for calculating the profit from the job

Characteristics of Process Costing

1-The production is continuous and product is homogeneous.
2-The process is standardized and the output of one process becomes the raw material of another process.
3-The output of the last process is transferred to finished stock.
4-Costs are collected process-wise
5-Both direct and indirect costs are accumulated in each process.

Examples of industries where process costing is practices-

1-Industries involved in chemical works, textile, weaving, spinning, etc.
2-Industries are producing gas, electricity, water, ice, steel, paper, cement, rubber, bread, etc.
3-Industries are producing bakeries, confectionery, flour mills, canners, manufacturers of medicine, fabricators, etc.
4-Industries involved in foundries, laundries, dyers, cleaners, etc.

Below types of companies can use Job Costing

Manufacturing Companies

Manufacturing companies incorporate job order costing as a means of controlling usage of raw materials, production equipment and labor hours. These businesses consider each customer order a separate job for the purposes of job order costing.

Construction Industry

Construction projects require a range of inputs, from labor to various types of materials and tools. Identifying the exact cost of all inputs for specific jobs can be challenging. Costing techniques in construction management require input workers on the job and solid record-keeping