Job order costing can be defined as a method of allocating costs to cost units that are large and can be identified separately. The cost units should be able to be identified and related to a specific order. The products produced in this process should be related to a certain order or they are distinctive in nature. In this costing system, we have direct expenses, overheads, the order price, plants or assets that relate to the job and other costs that are specifically for the job. It is usually used for contract costing where a separate account is created for the contract. The approach of job costing involves identification of the job, identification of direct costs, selection overhead cost-allocation base and allocation of these costs (Cokins, 2001).
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Process costing is the costing system where allocation of cost is to a process of production and units produced passes through many processes. In this costing system, the processes are well defined and the finished output of one process becomes the input of another. All costs both direct and indirect are charged to the process of production. It is used in those products with have continuous flow of identical products and it is hard to distinguish the units. The best examples of this include, oil refinery, paint manufacture, ink, textiles and many others.
In the process costing, there may be defects of products or services. A rate of defects regarded as normal in the past is no longer tolerable. Managers know that reducing defects reduces costs and makes their company more competitive. After defects have been discovered in process, rework, or scrap is possible. Defects of units are those products which are fully or partially completed but do not meet the standards required by customers for good units and that are discarded or sold for reduced price. If the can be improved they are returned to the system for reworking. Some amounts of spoilage, rework, or scrap are inherent in many production processes. An example of spoilage and rework occurs in the manufacture of high standards, but only at a considerable cost. Some amount of rock, which is scrap, is inevitable, but its volume can often be decreased (Michael and Tse, 2009).
Normal spoilage is spoilage inherent in particular production process that arises even under efficient operating conditions. Depending on the production process, management decides the spoilage it considers normal. Costs of normal spoilage are typically included, as a component of the costs of good units manufactured between good units cannot be made without also making some units that are spoiled (Eliyahu and Goldratt, 2004).
Abnormal spoilage is spoilage that would not arise under efficient operating conditions. It is not inherent in a particular process. The spoilage because of machine breakdowns and operator errors are abnormal spoilage. Abnormal spoilage is usually regarded as avoidable and controllable. Line operators and other plant personnel can generally decrease or eliminate abnormal spoilage by identifying reasons for machine breakdowns, accidents, and the like, and taking steps to prevent their recurrence. To highlight the effect of abnormal spoilage in a loss from Abnormal Spoilage account, this appears as a separate line item in the income statement.
We have already said that units of abnormal spoilage should be counted and recorded separately. These units can either be counted or not counted when computing output units-physical or equivalent- in a process costing system. An inspection point is the stage of the production cycle at which products are examined to occur at the stage of completion where inspection takes place. That is because spoilage is not defected. As a result, the spoiled units are assumed 100% complete with respect to direct materials (The ICFAI University, 2004).
The system works best in
The companies that use process costing are those companies that manufacture chemicals, soaps, spirits, paper, paint, oil products, biscuits, textiles and many companies that manufacture liquids.
Job costing is used in contracts and manufacturing of special orders.
Method to Use
Job costing is the best system to use in the planned production. Because there are, plans to increase number of products to produced in future. In evaluating the advantage of the proposed system, several other factors must also be considered on determining whether to pursue such managerial decision. However, with the incorporation of other relevant factors such as the improvement in the time delivery, product condition quality, and service reliability.
Cokins, G. (2001). Activity Based Cost Management. New York: John Wiley and Sons.
Eliyahu, M. & Goldratt J. (2004). The Goal – A Process of Ongoing Improvement. Boston: North River Press Publishing Corporation.
Michael S. & Tse M. (2009). Activity-Based Costing and Resource Consumption Accounting Models. Journal of Applied Management Accounting Research, 7(2) , 41-54.
The ICFAI University. (2004). Management Accounting & Control Systems. Hyderabad: The ICFAI University.