Proses Costing and Job Order Costing

Process costing From Wikipedia, the free encyclopedia Process costing is an accounting methodology that traces and accumulates direct costs, and allocates indirect costs of a manufacturing process. Costs are assigned to products, usually in a large batch, which might include an entire month's production. Eventually, costs have to be allocated to individual units of product. It assigns average costs to each unit, and is the opposite extreme of Job costing which attempts to measure individual costs of production of each unit. Process costing is usually a significant chapter. Process costing is a type of operation costing which is used to ascertain the cost of a product at each process or stage of manufacture. CIMA defines process costing as "The costing method applicable where goods or services result from a sequence of continuous or repetitive operations or processes. Costs are averaged over the units produced during the period". Process costing is suitable for industries producing homogeneous products and where production is a continuous flow. A process can be referred to as the sub-unit of an organization specifically defined for cost collection purpose.

The importance of process costing Costing is an important process that many companies engage in to keep track of where their money is being spent in the production and distribution processes. Understanding these costs is the first step in being able to control them. It is very important that a company chooses the appropriate type of costing system for their product type and industry. One type of costing system that is used in certain industries is process costing that varies from other types of costing (such as job costing) in some ways. In Process costing unit costs are more like averages, the process-costing system requires less bookkeeping than does a job-order costing system. So, a lot of companies prefer to use process-costing system.

When process costing is applied? Process costing is appropriate for companies that produce a continuous mass of like units through series of operations or process. Also, when one order does not affect the production process and a standardization of the process and product exists. However, if there are significant differences among the costs of various products, a process costing system would not provide adequate product-cost information. Costing is generally used in such industries such as petroleum, coal mining, chemicals, textiles, paper, plastic, glass, and food.

Reasons for use Companies need to allocate total product costs to units of product for the following reasons:  

A company may manufacture thousands or millions of units of product in a given period of time. Products are manufactured in large quantities, but products may be sold in small quantities, sometimes one at a time (automobiles, loaves of bread), a dozen or two at a time (eggs, cookies), etc.

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Product costs must be transferred from Finished Goods to Cost of Goods Sold as sales are made. This requires a correct and accurate accounting of product costs per unit, to have a proper matching of product costs against related sales revenue. Managers need to maintain cost control over the manufacturing process. Process costing provides managers with feedback that can be used to compare similar product costs from one month to the next, keeping costs in line with projected manufacturing budgets. A fraction-of-a-cent cost change can represent a large dollar change in overall profitability, when selling millions of units of product a month. Managers must carefully watch per unit costs on a daily basis through the production process, while at the same time dealing with materials and output in huge quantities. Materials part way through a process (e.g. chemicals) might need to be given a value, process costing allows for this. By determining what cost the part processed material has incurred such as labor or overhead an "equivalent unit" relative to the value of a finished process can be calculated.

Process cost procedures There are four basic steps in accounting for Process cost:    

Summarize the flow of physical units of output. Compute output in terms of equivalent units. Summarize total costs to account for and Compute equivalent unit costs. Assign total costs to units completed and to units in ending work in process inventory.

Operation cost in batch manufacturing Batch costing is a modification of job costing. When production is repetitive nature and consists of a definite number of articles, batch is used. In batch costing, the most important problem is to determine the optimum size of the batch that follows the fact that production of two elements of costs:      

Set up costs which are generally fixed per batch. Carrying costs which vadetermination of batch quantity requires considerations of some factors: setting up costs per batch. cost of manufacturing such as (direct materials cost + direct wages + direct overhead) per piece. cost of storage. rate of interest on the capital invested in product and rate of demand for product.

What Is a Process Costing System? By Holly Huntington, eHow Contributor Businesses must operate in the "black" or they go out of business. They must turn a profit, and it is in their best interest to make as high a profit as legitimately possible. Accounting methods used to record business material purchases, collect and record operational data and cost help companies to stay abreast of their overall costs and profit margins. The process costing system is one such method.

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1. Accounting Function o

Manufacturing companies use machinery to mass produce their products. They require an accounting system that enables them to calculate the cost of massproducing items in order to manage their costs better. Therefore, they use an accounting process that calculates the cost of operation for each phase of the product's production. That is known as a process costing system.

Collection Mechanism o

Before the accounting department can tally up the total overall costs being experienced by the company, they must do so in each department of the manufacturing facility. They collect the data using the process costing system mechanism, which requires reports to be kept on inventory purchases and uses, production and manpower hours and product output, as well as finished goods inventory. Each department keeps track of the materials used for the month, the labor time and hourly wages required to meet manufacturing demand that month, and the overhead expenses to operate the manufacturing building (utilities and mortgage), warehouse and machinery.

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Analysis Tool o

The recorded purchases, manpower hours, production data and remaining unfinished and finished goods inventory information serves the accounting department in the process costing system. This data is used for analysis to arrive at the actual cost to manufacture and purchase materials for the product and the individual unit cost of a product after these variables are analyzed.

Profit Gauge

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Process costing systems provide management with a more accurate gauge for assessing their profitability margin. All costs associated with the material purchasing, production of a good and completion of a unit of product are used to determine profit margins. This also shows if it is necessary to tweak the production process--and in which department or phase of the business enterprise.

Costing Reports o

Report analysis used in the process costing systems includes work orders that detail production runs and the amount of materials used from inventory for each. Production reports detail manpower labor hours used--and at what rate of pay--for each production run. Overhead cost reports detail rent/mortgage expense for the manufacturing facility--and utilities--as well as plant personnel and expenses required to operate the plant but not necessarily tied to a production run. The last report, the cost of production report, combines all the costs associated with production and then divides this final number with total number of units produced. This results in a per-unit cost, which aids management in setting a final cost after adding the desired profit margin.

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Job costing From Wikipedia, the free encyclopedia Jump to: navigation, search Job Costing involves the calculation of costs involved in a construction "job" or the manufacturing of goods done in discrete batches. These costs are recorded in ledger accounts throughout the life of the job or batch and are then summarized in the final trial balance before the preparing of the job cost or batch manufacturing statement.

Contents      

1 Job costing vs. process costing 2 Using job costing 3 Using cost codes in budgeting 4 Example 5 References 6 External links

Job costing vs. process costing Job costing (known by some as job order costing) is fundamental to managerial accounting. It differs from Process costing in that the flow of costs is tracked by job or batch instead of by process.

The distinction between job costing and process costing hinges on the nature of the product and, therefore, on the type of production process: 

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Process costing is used when the products are more homogeneous in nature.[1] Conversely, job costing systems assign costs to distinct production jobs that are significantly different. An average cost per unit of product is then calculated for each job. Process costing systems assign costs to one or more production processes. Because all units are identical or very similar, average costs for each unit of product are calculated by dividing the process costs by the number of units produced. Many businesses produce products with some unique features and some common processes. These businesses use costing systems that have both job and process costing features.[2]

Using job costing In a job costing system, costs may be accumulated either by job or by batch. For a typical job, direct material, labor, subcontract costs, equipment, and other direct costs are tracked at their actual values. These are accrued until the job or batch is completed. Overhead or "burden" may be applied either by using a rate based on direct labor hours or by using some other Activity Based Costing (ABC) cost driver. In either case, once overhead/burden is added, the total cost for the job can be determined. If the accountant is using a general ledger accounting system, which lacks true job costing functionality, the costs must be manually transferred out of Work in Process to Finished Goods (Cost of Goods Sold for service industries). Of course, in the days of computerized job costing software, journaling costs manually is an obsolete process. Such handjournaling is mandatory for companies that continue to use general accounting software to do job costing. Enlightened accountants are moving forward and using job costing software, thereby improving cost control, reducing risk, and increasing the chance of profitability.

Using cost codes in budgeting In a true job cost accounting system, a Budget is set up in advance of the job. As actual costs are accrued, they are compared to budgeted costs, to determine variances for each phase of each job. Cost Codes are used for each phase, allowing "mini-budgets" to be generated and tracked. In the construction industry, the Construction Specifications Institute (CSI) has established an industry standard Cost Coding system.job costing system consists of various cost driver that drives job cost, moreover it

Example These examples will assume that overhead is allocated on the basis of Direct Labor Hours. Direct Material is abbreviated DM, Direct Labor as DL, and Overhead as OH. XYZ corporation manufactures airplanes. 1 order was completed (#110), 2 received further work (#111, 112), and 1 new order was received (#113). Overhead is allocated at a rate of $100/DL Hour. All employees earn $20/hour. Beginning Work In Process Balances are as follows: #110, $25,000; #111, $10,000; #112, $12,000; #113 $0 (New Order). Below are the amounts of DM and DL used. 

#110 $2,000 DM, 25 DL hours. Therefore, $5,000 in new cost is added ($2,000 DM, $500 DL, $2,500 OH). The job had a total cost of $30,000. this amount is transferred out of Work in Process to Finished Goods or Cost of Goods Sold.

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#111 $3,000 DM, 30 DL hours. Therefore, $6,600 in new cost is added ($3,000 DM, $600 DL, $3,000 OH). The job has a new total cost of $16,600. This amount remains in Work in Process until completion. #112 $5,000 DM, 100 DL hours. Therefore, $17,000 in new cost is added ($5,000 DM, $2,000 DL, $10,000 OH). The job has a new total cost of $29,000. This amount remains in Work in Process until completion. #113 $1,000 DM, 10 DL hours. Therefore, $2,200 in new cost is added ($1,000 DM, $200 DL, $1000 OH). The job has a new total cost of $2,200. This amount remains in Work in Process until completion.

Caution: Remember, overhead is allocated on the basis of DL hours. While in this case, allocating overhead on the basis of DL cost ($5 of overhead for every $1 DL cost) would produce the same result, this may not always be the case. Since rates are developed based on a budget, if employees are actually paid a different rate from the budgeted rate, allocating at a $5 to $1 ratio would produce a different cost from the stated $100/DL hour allocation. Companies use slightly different overhead allocation methods.

References 1. ^ Don R. Hansen and Maryanne M. Mowen (2006). Cost Management Accounting & Control. Ohio: Thomas South-Western. pp. ????. ISBN 0-324-00232-7. 2. ^ Langfield-Smith, Kim (2009). Carolyn Leslie. ed (in English). Management accounting: information for creating and managing value/Langfield-Smith, Thorne and Hilton.. Australia: McGraw-Hill Australia Pty Ltd. p. 150. ISBN 978-0-07-013903-9.

What Is the Difference Between Job-Order & Process Costing Systems? By Carol Wiley, eHow Contributor Job-order costing and process costing systems are both accounting systems used to determine the cost of producing a product by measuring the amount of direct materials and direct labor required for production and allocating overhead costs at predetermined overhead rates. The difference between job-order and process costing systems is that job-order costing collects costs by job, while process costing collects costs by department for a specified time period.

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1. Job-Order Costing o

In job-order costing, direct materials costs and direct labor costs are usually tracked directly to jobs. The cost to make one unit of product is equal to the cost of the job divided by the number of units produced in the job. Manufacturers who produce special orders, customized products or standard products in batches use job-order costing.

Process Costing o

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In process costing, the cost to make one unit in one department is equal to the department's cost for the specified time period (for example, a month) divided by the number of units produced in that time period. The total cost for each unit is determined by adding the unit costs from all the departments that perform work on a product by adding materials, labor and overhead costs. Manufacturers who produce large quantities of identical units in a mass production setting use process costing. Sponsored Links  Document Solution Guide Learn Document Management Basics. Sign-Up For Your Free Guide Today! www.Laserfiche.com

Considerations o

Both systems maintain perpetual inventory records and use the same basic manufacturing accounts: raw materials, manufacturing overhead, work in process and finished goods.

Other Costing Systems o

Job-order and process costing are only two ways to determine product cost, although these two systems do represent the two extreme methods. However, many hybrid systems that incorporate elements of both job-order and process costing are available. For example, operation costing is used when products have some characteristics in common but also have individual characteristics. For example, models of stereos have some common characteristics and must be assembled and tested following the same basic steps, but each model also has different components with different costs.

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What is the Difference Between Process and Calculation in Job Order Costing? By Sam Grover, eHow Contributor Process costing and job order costing are very similar. Indeed, there are many situations where they can be the same thing. But the general rule is that process costing is broad-based, while job order costing is based on an individual job.

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1. Process Costing o

Process costing applies to manufacturing and services that are uniform and continuous. If the same amount of the same product is going to be produced every single day, then you can use process costing to help determine a selling price. You will need to find the cumulative cost of every process and add them together. Divide a period of time's process cost by the number of units to determine the perunit cost.

Job Order Costing o

Job order costing applies to industries that are not uniform, but rather produce goods or provide services in line with a client's specific needs. You cannot process cost multiple job orders because they do not have uniformity or continuity. If one client requests 8,000 pairs of blue jeans and another requests 5,000 Hawaiian shirts, the processes behind making these two items are going to be dramatically different.

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Overlaps o

You can use process costing within a type of job order. This is because one job over a period of time has both of the characteristics of the process costing mentioned above, uniformity and continuity. So, you can apply process costing within one type of job order but you cannot apply it between them.

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