Costing Systems: Job Order and Process
REVIEWING THE CHAPTER
Objective 1: Discuss the role that information about costs plays in the management process,
and explain why unit cost is important.
Throughout the management process, managers rely on the cost information that
management accounting provides. When managers plan, they use information about unit
costs to estimate product or service costs, set reasonable selling prices, establish
performance goals, and develop budgets. In performing daily operations, managers use
timely cost and volume information to support decisions about controlling costs, managing
volume, ensuring product or service quality, and negotiating prices. When managers
evaluate performance, they watch for changes in costs and quality. They compare actual and
targeted costs and monitor relevant price and volume information. This enables them to
make necessary adjustments to their plans and decision-making strategies. When managers
communicate results to shareholders, they use unit costs in preparing financial statements
and performance evaluation reports.
Objective 2: Distinguish between the two basic types of product costing systems, and
identify the information each provides.
product costing system
is a set of procedures used to account for an organization’s
product costs and to provide timely and accurate unit cost information for pricing, cost
planning and control, inventory valuation, and financial statement preparation. Job order
costing and process costing are the two basic types of product costing systems.
Companies that make one-of-a-kind, special-order products or that provide custom services,
such as shipyards, makers of custom cabinets, or wedding planners, use a
job order costing
Such a system traces the costs of direct materials, direct labor, and overhead to a
specific batch of products or job order. A
is a customer order for a specific
number of specially designed, custom-made products or services. A job order costing
system measures the cost of each complete unit and summarizes the costs of all jobs in a
single Work in Process Inventory account that is supported by job order cost cards. A
order cost card
is a record of all costs incurred in the production of a particular job order.
Companies that produce large amounts of similar products or liquid products or that have a
continuous production flow—for example, makers of paint, cars, or breakfast cereal—
typically use a
process costing system.
Such a system first traces the costs of direct
materials, direct labor, and overhead to processes, departments, or work cells and then
assigns the costs to the products manufactured by those processes, departments, or work
cells. A process costing system uses several Work in Process Inventory accounts, one for
each department, process, or work cell.