991400 Accounting for Management
Unit 1 PRODUCT COSTING METHODS: JOB ORDER COSTING, PROCESS COSTING, AND ACTIVITY-BASED COSTING
Section 1.1 INTRODUCTION
A cost accumulation system is a product costing system. This process accumulates manufacturing costs such as materials, labor and factory overhead and assigns them to cost objectives, such as finishedgoods and work?in?process. Product costing is necessary not only for inventory valuation and income determination but also for establishing the unit sales price. We will discuss the essentials of the cost accumulation system that is used to measure the manufacturing costs of products. This is essentially a two?step process: (1) the measurement of costs that are applicable to manufacturingoperations during a given accounting period and (2) the assignment of these costs to products. There are two basic approaches to cost accounting and accumulation: (1) Job order costing and (2) Process costing Using the traditional methods of assigning overhead costs to products, using a single predetermined overhead rate based on any single activity measure, can produce distorted product costs.Activity-based costing (ABC) attempts to get around this problem. An ABC system assigns costs to products based on the product’s use of activities, not product volume. It has proved to produce more accurate product costing results in an environment where there is diversity in product line and services coming out of the same shop. After reading the material in the unit: • You will be familiar with job ordercosting. • You will be able to see what a job cost sheet looks like. • You will be able to prepare journal entries for a job order cost system. • You will be able to learn about how to develop a predetermined overhead rate. • You will be able to explain the problems associated with traditional overhead costing methods. • You will be able to describe how activity-based costing (ABC) would enhanceproduct costing accuracy. • You will be able to illustrate the two-step procedure involved in activity-based costing. • You will be able to associate different cost drivers with different cost pools.
Section 1.2 JOB ORDER COSTING AND PROCESS COSTING COMPARED
The distinction between job order costing and process costing centers largely around how product costing is accomplished. With job ordercosting, the focus is to apply costs to specific jobs or batches, which may consist of either a single physical unit or a few like units. Under process costing, accounting data are accumulated by the production department (or cost center) and averaged over all of the production that occurred in the department. Here there is mass production of like units which are manufactured on a continuous basisthrough a series of uniform production steps known as processes. Figure 1 summarizes the basic differences between these two methods.
991400: Accounting for Management
FIGURE 1 DIFFERENCES BETWEEN JOB ORDER COSTING AND PROCESS COSTING
Section 1.3 JOB ORDER COSTING
Job order costing is the cost accumulation system under which costs are accumulated by jobs, contracts, or orders.This costing method is appropriate when the products are manufactured in identifiable lots or batches or when the products are manufactured to customer specifications. Job order costing is widely used by custom manufacturers such as printing, aircraft, and construction companies. It may also be used by service businesses such as auto repair shops and professional services. Job order costing keepstrack of costs as follows: direct material and direct labor are traced to a particular job. Costs not directly traceable--factory overhead--are applied to individual jobs using a predetermined overhead (application) rate.
Section 1.4 JOB COST RECORDS
A job cost sheet is used to record various production costs for work-in-process inventory. A separate cost sheet is kept for each identifiable...