Question

Using the knowledge you have gained about job order costing and process costing, identify three products (include companies) for each costing method. Make sure to include your reasoning behind costing methods.

Answer 1

Solution :-

Costing Methods : Basically, Job order Costing and Process Costing are the two methods of cost finding. i.e. methods of cost ascertainment. Costing methods are the fundamental procedural steps to be followed for the measurement and estimation of cost based upon the nature of production.

1. Job Order Costing - Job order costing refers to the cost procedures that ascertains the cost of an individual job or work order. The job here represents the cost centre/cost unit. Many organisations manufacture products when they receive an order from customer. Different orders generally do not pass through the same manufacturing process. As the name itself implies that in the job order costing the object is to determine the production cost or service cost of individual jobs/order. The distinguishing feature of job order costing is the ability to identify costs with specific project/job order. Job order costing is appropriate for industries such as repairs shops, printing shops, public accounting firms, contractors, ship builders, customized software engineers, hotels, hospitals, interior and exterior decorators, tailors etc. Few are discussed in detail -

(i). Repairs shop/Car Service stations where each repair job requires varying amount of material and labour. The mechanic will charge the cost for any of the replaced parts and number of labour hours/machine hours spent in repairing. Bosch Car Service is using job order costing over its chain of work shops world wide.

(ii). Hospitals where cost of services provided to each patient are different. NYU Langone Health hospital in New York is using job order costing to identify the cost of each patient.

(iii). Public Accounting firms, where each audit tax return, accounting work or management consulting service engagements need varying amount of professional time, skill and attention. Grant Thornton is one of the leading organizations of independent audit, tax and advisory firms is also using job order costing for charging to its clients.

Job order costing is used when work/service orders are dissimilar and are required to be performed as per specifications (designs, measurements, features, qualities etc) of and desires of the customer at the time of placing a order or modified thereafter.

2. Process Costing - When in an organisation one product or two or three variants of the same product are continuously manufactured on mass scale and all the units of the same product are identical then process costing method is applied and average cost per unit of the concerned product is ascertained. It refers to the procedure of determining the average cost per unit in situations in which product passes through more than one well defined stage of the manufacturing process to the next manufacturing stage. It is used when identical units are produced through an on-going series of uniform production steps. Process costing is appropriate for industries such as chemicals, food processing, breweries, sugar, petrol, refining edible oil, glass, metal manufacturing, steel making, paper, cement, textile, bakery, paint etc. Few are discussed in detail -   

(i). Hanwha Company chemical division is using process costing method to determine the unit cost of the product.

(ii). Pacific Brewery Systems Inc. is using the process costing method of ascertaining cost of the product where product is transferred to next process for further processing or to finish stock inventory and offered for sale.

(iii). TRInternational, Inc. is using process costing method for generally all of its divisions namely oil, paint, inks, dyes, chemical, food etc to determine the cost of the product because the output is homogeneous and production is continuous with clearly identifiable processes.