Question

Compare and contrast job-order and process costing systems. How can events in a job-order costing system affect financial statements? How can events in a process costing system affect financial statements? Provide specific examples for each type.

Answer 1

Job Costing:

1.Job order costing is the optimal accounting method when costs and production specifications are not identical for each product or customer but the direct material and direct labor costs can easily be traced to the final product. Job order costing is often a more complex system and is appropriate when the level of detail is necessary.

Example for Job costing is tax returns or audits conducted by a public accounting firm, custom furniture

2.Process costing is the optimal costing system when a standardized process is used to manufacture identical products and the direct material, direct labor, and manufacturing overhead cannot be easily or economically traced to a specific unit.

Process costing is used most often when manufacturing a product in batches. Each department or production process or batch process tracks its direct material and direct labor costs as well as the number of units in production.

The actual cost to produce each unit through a process costing system varies, but the average result is an adequate determination of the cost for each manufactured unit.

Examples of Process Costing are soft drinks, petroleum products, or even furniture such as chairs, assuming that the company makes batches of the same chair, instead of customizing final products for individual customers.

3. effects of events in Job Order Costing System on Financial Statements:

a.To assure that materials costs are properly allocated to jobs in process, a materials requisition form is usually completed as materials are taken from the raw materials inventory and added to work‐in‐process

b.Labor costs are allocated to work‐in‐process inventory based on the completion of time tickets identifying what job a worker spent time on.

c. Factory overhead costs are allocated to jobs in process using a predetermined overhead rate. This is determined by estimating total factory overhead costs and dividing these total costs by direct labor hours

d.Once a job is completed, the total costs assigned to the job are transferred from work‐in‐process inventory to finished goods inventory.

4.effects of events on using process costing system on financial statements:

a.The raw materials are assigned based on material requisition forms, the labor based on time tickets, and the overhead based on predetermined overhead rates based on direct labor dollars.

b.The journal entries to record these transactions are made prior to the period end entries that transfer the amounts from one work‐in‐process inventory account to another, from work‐in‐process inventory to finished goods inventory, and from finished goods inventory to cost of goods sold.