Costing Systems

The type of product a company manufactures affects the type of costing system needed to determine product cost. The 2 most common types of costing systems are job-order costing and process costing.

Respond to the following

Compare and contrast job-order and process costing systems.

How can events in a job-order costing system affect financial statements? Provide a specific example.

How can events in a process costing system affect financial statements? Provide a specific example.

Reply to these two classmate’s statements below whether you agree or disagree. State why and explain. or your faculty member. Be constructive and professional.

1)

The methods of job order costing and process costing are deployed by companies to effectively manage and allocate production costs. Job order costing is utilized when tracking the costs associated with the production of individual, custom products or services, such as tailor-made cakes for specific events. In contrast, process costing is implemented in scenarios where companies produce large quantities of identical items, such as cookies in a factory, and need to distribute the costs across all units produced.In a job order costing system, events such as material usage, labor costs, and overhead expenses for each specific job can significantly impact the company’s financial statements. Underestimating the required materials for a specific job may result in higher-than-planned costs, thereby affecting the profit margin for that particular job. Such cost variations can directly influence the income statement and subsequently impact the company’s overall financial performance.Conversely, a process costing system is impacted by events such as fluctuations in production volume or unanticipated increases in overhead costs. For example, a sudden rise in energy costs due to increased production levels can lead to higher costs per unit produced, ultimately impacting the company’s profitability as reflected in the financial statements. These cost fluctuations directly influence the income statement and can alter the company’s financial standing.

2)Hi all,

Job Costing Method:

The job costing method is used when each product or job has traceable costs. This method is employed for unique products or customized items such as custom furniture, special machinery, or construction projects. It is used for small production volumes or single-unit jobs. The job costing method requires more detailed record-keeping due to time and materials that must be charged to specific jobs. Labor, materials, and other costs are tracked for each job separately. This method is often used for billing to customers, especially when the seller bills based on cost.

Process Costing Method:

The process costing method is a costing system in which a product is mass-produced or standardized products, and costs are determined by equivalent units produced. Costs are aggregated at the department level for simple record-keeping. This method is used for lengthy production runs involving indistinguishable units. The process costing method provides a consistent cost per unit, which affects inventory valuation and cost of goods sold, ensuring uniformity in financial statements across production batches.

Examples of JCM:

If a furniture company doing a specialized job and creating a high-end dining table, where the costs incurred for labor, wood, and materials are charged directly to the job. The cost of goods sold on the income statement includes specific costs related to the job. On the balance sheet, the finished table’s cost is part of the inventory until it’s sold.