Chapter 3 Notes
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There are basically two approaches to assign manufacturing costs to products produced
or services rendered: Job-Order Costing and Process Costing.
The approach that you
use depends upon the character of your production operations.
Products and services are often produced according to a
customer's order. Because every job is different, the cost
of each product or service will be different. Because of
this difference in cost, you have to keep track of the cost
of every job separately. This is what occurs with Job-
Order Costing (also called Job Costing).
that typically use Job-Order Costing include print shops,
companies, and film studios. In all of these cases, the
firm keeps track of the cost of each job separately
because each order is different. For example, in 1975
Universal Studios made both Jaws and the Columbo
television series. The cost of these products differed
greatly ($12 million vs. $600,000 per episode).
Process Costing is used in assembly-line operations or
where the products are standard.
Because all of the
products are the same, they should all cost the same to
Therefore, with Process Costing you treat the
average cost to produce the products as the cost of
You do not keep track of the cost to make
each unit separately.
Not all operations are clearly Job-Order Costing or
Process Costing. Think of a Nissan Sentra. They all have basic, common features that
cost the same to produce (e.g., the body). Different models, however, have different
engines, seat fabrics and/or sound systems. To the extent that all the Sentras produced
have the same common features, Nissan can use Process Costing. To the extent that
different models have different features, then they can use Job-Order Costing to keep
track of the costs of the different features by model. This is called Operation Costing
(also called Hybrid Costing).
A recent survey found that:
51.1% manufacturing firms used Job-Order Costing;
14.2% manufacturing firms used Process Costing;
10.6% manufacturing firms used Operation Costing; and
24.1% manufacturing firms used Standard Costing.
Columbo Goes To College
Naturally, they respond by killing
their professor. Unfortunately for
them, Lt. Columbo is the guest
lecturer that night, and he solves
DON’T EVEN THINK ABOUT IT!