Question

Please identify two products, that would use process order costing. Explain why job order would not be appropriate for them. Identify some of the direct materials, direct labor and overhead costs associated with each of the products. Identify an appropriate activity that could be used for the predetermined overhead rate allocation.

Answer 1

Definitions:

PROCESS COSTING : This is the type of costing in which DETERMINATION and ALLOCATION of COST to the products should done at each process.

Examples : Extraction of petroleum products,Sugar manufacturing industries.

JOB COSTING : It is type of costing in which DETERMINATION of COST should be done for each job separately.

Examples : Interior decoration, Medical services in hospitals.

From the above definition, It is not possible to employ job ordering costing to them. Because job costing cost is allocated at end completion of job but process costing several products are obtained at different stages of process..

Direct materials:

Sugar industries :sugar cane

Petroleum industries : crude oil

Direct labour:

Skilled and unskilled labour.

Overhead costs:

Rent, electricity, administration overheads.

Rent to the factory building and depreciation to machinery is pre determined overhead cost.