Proses Costing and Job Order Costing

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Process costing

From Wikipedia, the free encyclopedia

Process costingis an accounting methodology that traces and accumulatesdirect costs,andallocatesindirect costsof a manufacturing process. Costs are assigned to products, usually in alarge batch, which might include an entire month's production. Eventually, costs have to beallocated to individual units of product. It assigns average costs to each unit, and is the oppositeextreme ofJob costingwhich 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 thecostof a product ateach process or stage of manufacture.CIMAdefines process costing as "The costing methodapplicable 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 issuitable for industries producing homogeneous products and where production is a continuousflow. A process can be referred to as the sub-unit of an organization specifically defined for costcollection purpose.

The importance of process costing

Costing is an important process that many companies engage in to keep track of where theirmoney is being spent in theproductionand distribution processes. Understanding these costs isthe first step in being able to control them. It is very important that a company chooses the

appropriate type of costingsystemfor their product type and industry. One type of costingsystem that is used in certain industries is process costingthat varies from other types of costing(such asjob 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 lotof 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 unitsthrough 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 significantdifferences among the costs of variousproducts,a process costing system would not provideadequate product-cost information. Costing is generally used in suchindustriessuch 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 atime (eggs, cookies), etc.
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Product costs must be transferred from Finished Goods to Cost of Goods Sold as sales aremade. 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 themanufacturingprocess. Process costing

provides managers with feedback that can be used to compare similar product costs fromone 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 overallprofitability,when selling millions of units of product a month. Managers must carefullywatch per unit costs on a daily basis through the production process, while at the sametime 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 hasincurred 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 stepsinaccountingfor Process cost:

Summarize the flow of physical units ofoutput. 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 processinventory.

Operation cost in batch manufacturing

Batchcosting is a modification ofjob costing.When production is repetitive nature and consistsof a definite number of articles, batch is used. In batch costing, the most important problem is todetermine the optimum size of the batch that follows the fact that production of two elements ofcosts:

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 ofmanufacturingsuch as (direct materials cost+ directwages+ direct overhead) per

piece.

cost ofstorage. 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 methodsused to record business material purchases, collect and record operational data and cost helpcompanies to stay abreast of their overall costs and profit margins. The process costing system isone such method.
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Other People Are Reading

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Accounting Functiono Manufacturing companies use machinery to mass produce their products. They

require an accounting system that enables them to calculate the cost of mass-producing items in order to manage their costs better. Therefore, they use anaccounting 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 beingexperienced by the company, they must do so in each department of themanufacturing facility. They collect the data using the process costing systemmechanism, which requires reports to be kept on inventory purchases and uses,

production and manpower hours and product output, as well as finished goodsinventory.

Each department keeps track of the materials used for the month, the labor timeand hourly wages required to meet manufacturing demand that month, and theoverhead 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 remainingunfinished and finished goods inventory information serves the accountingdepartment in the process costing system. This data is used for analysis to arriveat the actual cost to manufacture and purchase materials for the product and theindividual unit cost of a product after these variables are analyzed.

Profit Gauge
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_process-costing-system.htmlhttp://www.ehow.com/info_8404770_stages-transactions-job-costing-system.htmlhttp://www.ehow.com/info_8552571_difference-joborder-process-costing-systems.html


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o Process costing systems provide management with a more accurate gauge forassessing their profitability margin. All costs associated with the material

purchasing, production of a good and completion of a unit of product are used todetermine 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 thatdetail 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--foreach production run. Overhead cost reports detail rent/mortgage expense for themanufacturing facility--and utilities--as well as plant personnel and expensesrequired to operate the plant but not necessarily tied to a production run. The lastreport, 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 finalcost after adding the desired profit margin.

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Job costing

From Wikipedia, the free encyclopediaJump to:navigation,search

Job Costinginvolves the calculation of costs involved in a construction "job" or themanufacturing of goods done in discrete batches. These costs are recorded in ledger accountsthroughout the life of the job or batch and are then summarized in the final trial balance beforethe 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. Itdiffers fromProcess costingin that the flow of costs is tracked by job or batch instead of by

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

Process costing is used when the products are more homogeneous in nature.[1]Conversely, job costing systems assign costs to distinct production jobs that aresignificantly 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 allunits are identical or very similar, average costs for each unit of product are calculated bydividing the process costs by the number of units produced.

Many businesses produce products with some unique features and some commonprocesses. These businesses use costing systems that have both job and process costingfeatures.[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 theiractual values. These are accrued until the job or batch is completed.Overheador "burden" maybe applied either by using a rate based on direct labor hours or by using some otherActivityBased Costing (ABC)cost driver.In either case, once overhead/burden is added, the total costfor 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 inProcess toFinished Goods(Cost of Goods Soldfor service industries). Of course, in the days ofcomputerized job costing software, journaling costs manually is an obsolete process. Such hand-

journaling is mandatory for companies that continue to use general accounting software to do jobcosting. Enlightened accountants are moving forward and using job costing software, therebyimproving cost control, reducing risk, and increasing the chance of profitability.

Using cost codes in budgeting

In a true job cost accounting system, a Budgetis set up in advance of the job. As actual costs areaccrued, they are compared to budgeted costs, to determine variances for each phase of each job.Cost Codesare used for each phase, allowing "mini-budgets" to be generated and tracked. In theconstruction industry, theConstruction Specifications Institute(CSI) has established an industrystandard Cost Coding system.job costing system consists of various cost driver that drives jobcost, 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/DLHour. 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 DMand 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 outof Work in Process to Finished Goods or Cost of Goods Sold.
http://en.wikipedia.org/wiki/Job_costing#cite_note-IEOB-0http://en.wikipedia.org/wiki/Job_costing#cite_note-IEOB-0http://en.wikipedia.org/wiki/Job_costing#cite_note-IEOB-0http://en.wikipedia.org/wiki/Job_costing#cite_note-1http://en.wikipedia.org/wiki/Job_costing#cite_note-1http://en.wikipedia.org/wiki/Job_costing#cite_note-1http://en.wikipedia.org/wiki/Overhead_%28business%29http://en.wikipedia.org/wiki/Overhead_%28business%29http://en.wikipedia.org/wiki/Overhead_%28business%29http://en.wikipedia.org/wiki/Activity-based_costinghttp://en.wikipedia.org/wiki/Activity-based_costinghttp://en.wikipedia.org/wiki/Activity-based_costinghttp://en.wikipedia.org/wiki/Cost_driverhttp://en.wikipedia.org/wiki/Cost_driverhttp://en.wikipedia.org/wiki/Cost_driverhttp://en.wikipedia.org/wiki/Finished_goodhttp://en.wikipedia.org/wiki/Finished_goodhttp://en.wikipedia.org/wiki/Finished_goodhttp://en.wikipedia.org/wiki/Cost_of_goods_soldhttp://en.wikipedia.org/wiki/Cost_of_goods_soldhttp://en.wikipedia.org/wiki/Cost_of_goods_soldhttp://en.wikipedia.org/wiki/Construction_Specifications_Institutehttp://en.wikipedia.org/wiki/Construction_Specifications_Institutehttp://en.wikipedia.org/wiki/Construction_Specifications_Institutehttp://en.wikipedia.org/wiki/Construction_Specifications_Institutehttp://en.wikipedia.org/wiki/Cost_of_goods_soldhttp://en.wikipedia.org/wiki/Finished_goodhttp://en.wikipedia.org/wiki/Cost_driverhttp://en.wikipedia.org/wiki/Activity-based_costinghttp://en.wikipedia.org/wiki/Activity-based_costinghttp://en.wikipedia.org/wiki/Overhead_%28business%29http://en.wikipedia.org/wiki/Job_costing#cite_note-1http://en.wikipedia.org/wiki/Job_costing#cite_note-IEOB-0


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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 inWork 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 remainsin 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 inWork 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 abudget, if employees are actually paid a different rate from the budgeted rate, allocating at a $5to $1 ratio would produce a different cost from the stated $100/DL hour allocation. Companiesuse slightly different overhead allocation methods.

References

1. ^Don R. Hansen and Maryanne M. Mowen (2006). Cost Management Accounting &Control.Ohio:Thomas South-Western. pp. ????.ISBN0-324-00232-7.

2. ^Langfield-Smith, Kim (2009). Carolyn Leslie. ed (in English).Managementaccounting: information for creating and managing value/Langfield-Smith, Thorne and

Hilton.. Australia: McGraw-Hill Australia Pty Ltd. p. 150.ISBN978-0-07-013903-9.

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 thecost of producing a product by measuring the amount of direct materials and direct laborrequired 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 costsby job, while process costing collects costs by department for a specified time period.


What is the Difference Between Process and Calculation in Job Order Costing?

The Differences Between Job-Order Costing & Process Costing
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Print this article

1.

Job-Order Costingo 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 costof the job divided by the number of units produced in the job. Manufacturers who

produce special orders, customized products or standard products in batches usejob-order costing.

Process Costing

o In process costing, the cost to make one unit in one department is equal to thedepartment's cost for the specified time period (for example, a month) divided bythe number of units produced in that time period. The total cost for each unit isdetermined by adding the unit costs from all the departments that perform workon a product by adding materials, labor and overhead costs. Manufacturers who

produce large quantities of identical units in a mass production setting use processcosting.

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Considerationso Both systems maintain perpetual inventory records and use the same basic

manufacturing accounts: raw materials, manufacturing overhead, work in processand 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 processcosting are available. For example, operation costing is used when products havesome characteristics in common but also have individual characteristics. Forexample, models of stereos have some common characteristics and must beassembled and tested following the same basic steps, but each model also hasdifferent 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 wherethey can be the same thing. But the general rule is that process costing is broad-based, while joborder costing is based on an individual job.


What Is the Difference Between Job-Order & Process Costing Systems?

The Differences Between Job-Order Costing & Process Costing

Print this article

1.

Process Costingo 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 everysingle 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 per-unit cost.

Job Order Costing

o Job order costing applies to industries that are not uniform, but rather producegoods or provide services in line with a client's specific needs. You cannot

process cost multiple job orders because they do not have uniformity orcontinuity. If one client requests 8,000 pairs of blue jeans and another requests5,000 Hawaiian shirts, the processes behind making these two items are going to

be dramatically different.o

Overlaps

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

Read more:What is the Difference Between Process and Calculation in Job Order Costing? |
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Proses Costing and Job Order Costing

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