Question

In your professional experience (current or previous), think of a specific company you have worked extensively for or with. Is (Was) a job order costing or process costing system more suited to the primary revenue* producing function? As part, if not all, of your response, include specific answers to the following:

The name of the business (If confidentiality is involved, I am the only one reading this. )

The primary revenue* producing function (If more than one, pick one and use just it from here forward.)

Which type of costing system you selected (job order OR process costing)

Support for your choice of a costing system (Specifically why job order OR Why process costing best suited)

*If your experience is with non-profits or governmental entities, use the entity's core function (as above if more than one, pick one).

Answer 1

I was associated with the following business:

Name of the business: Farida Shoes Limited

Primary revenue producing function: Export of leather made footwear to various countries.

We chose Job order costing as it is more suited than the process costing, for the following specific reasons:

The company received specific orders from various customers across the globe. 90% of the orders for footwears are for women’s styles, where, the fashion will change more frequently and the customer is very specific about the fashion. Once order was received in fax, it is forwarded to the “design” team, which prepares complete specification of the order, listing in detail;

Quantity of Raw material required (specific leather quality and type of leather), and

Other consumables to be used.

The specification is forwarded then to costing department which prepares estimated cost of the order. Based on this quotation, if the order is approved, it is executed by the planning and operation team.

The challenge here is, not to exceed the cost given in the quotation. Hence, the teams have to strictly conform to the usage of specified consumables and raw materials. This enables the management to review the executed orders’ profitability vis a vis, the cost estimation.

Hence, in view of the unique customer orders, job order costing system was more appropriate and practical.