Job-order and process costing systems

  Comparison of Job-Order and Process Costing Systems Job-Order Costing System: Job-order costing is used when products or services are produced in distinct batches or jobs. Costs are accumulated by job or order, allowing for the calculation of the total cost per job. Costs are traced to specific jobs based on direct materials, direct labor, and overhead costs. Each job has unique characteristics or specifications, making it distinguishable from other jobs. Examples of industries that use job-order costing include custom manufacturing, construction, and printing. Process Costing System: Process costing is used when products or services are produced in a continuous, repetitive process. Costs are accumulated by process or department, allowing for the calculation of the average cost per unit. Costs are allocated to products based on the production volume or equivalent units produced. Each unit produced is identical or similar to other units, making it challenging to differentiate costs by individual units. Examples of industries that use process costing include food processing, chemical manufacturing, and oil refining. Events in Job-Order Costing System Affecting Financial Statements In a job-order costing system, events can affect financial statements in the following ways: Direct Material Purchases: When direct materials are purchased for a specific job, the cost of these materials is recorded as an increase in the Raw Materials inventory account on the balance sheet. This increases the assets of the company. Direct Labor Costs: As direct labor is incurred for a specific job, the wages paid to employees are recorded as an increase in the Work-in-Progress (WIP) inventory account on the balance sheet. This reflects the value of labor added to the job. Overhead Allocation: Overhead costs, such as utilities, rent, and indirect labor, are allocated to jobs based on predetermined rates or cost drivers (e.g., direct labor hours). These allocated overhead costs are recorded as an increase in the WIP inventory account on the balance sheet. However, this does not impact the financial statements until the job is completed. Job Completion: When a job is completed, the total cost of the job, including direct materials, direct labor, and allocated overhead, is transferred from the WIP inventory account to the Finished Goods inventory account on the balance sheet. Simultaneously, the cost of goods sold (COGS) on the income statement increases by the same amount. This reflects the cost of producing the specific job and reduces the WIP inventory. Events in Process Costing System Affecting Financial Statements In a process costing system, events can affect financial statements in the following ways: Direct Material Usage: When direct materials are used in the production process, their cost is recorded as an increase in the Raw Materials inventory account on the balance sheet. This reflects the usage of raw materials. Direct Labor Costs: As direct labor is incurred during the production process, the wages paid to employees are recorded as an increase in the Work-in-Progress (WIP) inventory account on the balance sheet. This represents the value of labor added to the production process. Overhead Allocation: Overhead costs, such as factory utilities and indirect labor, are allocated to each process or department based on predetermined rates or cost drivers (e.g., machine hours). These allocated overhead costs are recorded as an increase in the WIP inventory account on the balance sheet. Completed Units: When units are completed within a process or department, their total cost (including direct materials, direct labor, and allocated overhead) is transferred from the WIP inventory account to the Finished Goods inventory account on the balance sheet. Simultaneously, the COGS on the income statement increases by the same amount. This reflects the cost of finished units and reduces the WIP inventory. Example: In a job-order costing system, if a construction company completes a specific building project for a client, the total cost of that project (direct materials, direct labor, and allocated overhead) will be transferred from WIP to Finished Goods inventory. This will increase the value of Finished Goods on the balance sheet while also increasing COGS on the income statement. In a process costing system, if a beverage company produces 10,000 bottles of soda during a month in its production process, and those bottles are completed and ready for sale, their total cost (direct materials, direct labor, and allocated overhead) will be transferred from WIP to Finished Goods inventory. This will increase both Finished Goods on the balance sheet and COGS on the income statement.      

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