Chapter 4 Systems Design

Chapter 4 Systems Design - Chapter 4 Systems Design Process...

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Chapter 4 – Systems Design: Process Costing Managers need to assign costs to products to facilitate external financial reporting and internal decision making. This chapter illustrates an absorption costing approach to calculating product costs known as process costing. Process Costing – Used most commonly in industries that convert raw materials into homogenous products. Comparison of Job-Order and Process Costing Similarities between Job-Order and Process Costing Job-order and process costing are similar in that they both deal with assigning materials, labor and overhead to products as a way to calculate the unit product cost. Both systems use Raw Materials Inventory, Work in Process Inventory, and Finished Goods Inventory. The flow of costs is similar, but not exactly the same, in the two systems. Differences between Job-Order and Process Costing Process costing is best suited for the production of a single product that is continuously produced for a long period of time. Recall the mixing and bottling of Coca-Cola from Chapter Three. Job-order costing is best suited when jobs are produced as discrete projects. For example, building a house. Process costing accumulates costs by department, while job-order costing accumulates costs by individual jobs . Process costing uses a fundamental document called a department production report , while job-order costing uses the job cost sheet. In process costing unit cost is computed by department, while in job-order systems unit cost is computed by job . While there are similarities between the two systems, there are also significant differences. Cost Flows in Process Costing Processing Departments A processing department is any unit in an organization where materials, labor, or overhead are added to the product. The output from a processing department is homogeneous, that is, they all appear the same. Products in a process costing environment typically flow in a sequence from one department to another. Comparing Job- Order and Process Costing There is a key fundamental difference between process and job-order costing systems. Job-order costing systems trace and apply manufacturing costs to jobs. One Work in Process account is often used to accumulate
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costs for all jobs. The individual job cost sheets serve as a subsidiary ledger. In a process costing systems, costs are traced to departments that process the goods. In some companies there may be several processing departments that goods must pass through to become finished goods. A separate Work in Process account is maintained for each processing department. Material, labor and overhead costs transferred from one department’s Work in Process account to another department’s Work in Process account are called transferred-in costs.
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