Running head: JOB COSTING SYSTEM OR PROCESS COSTING SYSTEM 1
JobCosting System or Process Costing System
Theimportance of costing systems cannot be gainsaid as far as thesustainability of any business entity is concerned. Indeed, itdetermines the manner in which operations in a business entity arecarried out, as well as the amount that is dedicated to particularoperations. Costing systems are crafted in order to monitor or keepan eye on the costs that a business incurs. Such systems are composedof a collection of controls, processes, forms and reports designed tocombine or aggregate, as well as report to the management pertainingto profitability, costs and revenues (Oliver & Amacom, 2000). Themanagement would use such information in varied ways including makingdecisions pertaining to expenses that must be cut off, fine-tuningoperations so as to enhance profitability, creation of tactical andstrategic plans, as well as matching the actual costs that areincurred against the budgeted levels of costs for the purpose ofcontrol. Varied control systems, however, would be suitable fordifferent situations, which is the case for process costing systemand job costing system.
Jobcosting refers to the accumulation, classifying and assigning directmaterials, direct labor and overhead costs to specific jobs, projectsor products. In this system, costs are accumulated by tracing coststo specific products or services or accumulating the costs atdepartmental levels. Job costing is used when the management wishesto use product or services costs in assessing the financial effectsthat would be accrued in the event of adding or deleting a product ormake a decision on profitability performance. Job costing helpscompanies determine the costs of products or services that facilitatemanagement in planning, performance evaluation and cost control.
Furthermore,companies are likely to use job costing system when wide varieties ofproducts or services are produced. In this case, companies that usejob costing system include among others printing shops, equipmentfirms, shipbuilding, medical services, customs furniture’s,accounting and construction companies. This system of costing iseffective when costs incurred for a particular job is easilytraceable along a certain product, contract, order orproject(Popesko,2012).Specific examples of companies that utilize job costing are FedEx,Jiffy Lube International and Accenture among others. This signifiesthat, most service companies apply job costing system when evaluatingthe pricing of their products or services.
Whenjob costing system is used, this may apply to particular products orservices. In this system of costing, the job cost sheet records allcosts accumulated as a result of direct materials, factory overheadand direct labor used. For instance, the job cost sheet ofThomasville Furniture Industries (TFI) in North Carolina wouldconsist of material, labor and overhead costs for every batch oftwenty tables (Shukuhian &Yal,2012).In this case, material costs will also feature direct and indirectcosts of the materials purchased such as fabrics, lumber, nails andglue among other costs.
Laborcosts incurred in the process of material acquisition are recordedunder factory overheads as material inventory. However, in some casesthis is recorded under direct and indirect labor costs. Factoryoverhead costs are used to signify non-traceable costs related toindividual jobs (Popesko,2009).Therefore, a good costing system is required to assign the costsaccurately to specific products or services. In some aspects, someoverhead costs originate with the purchase, storage or delivery ofmaterials and are placed under work in progress. These costs arelater transferred to the finished products during the sellingprocess. For instance, during the process of materials acquisitionsome form of labor is used, and this is recorded as actual costs inthe factory overheads. However, at times normal costing is used topre-determine allocation rates for costs incurred during theacquisition of direct materials or direct labor (Blocher,Stout, Juras& Cokins, 2013).
Mostservice industries prefer job costing extensively. As such, differentterms are used to infer job cost these terms are project cost,client costs or contract costs. Service industries apply recordingprocedures similar to the job costing, but the primary focus is ondirect labor overhead costs are based on direct labor costs(Popesko,2012).For instance, assume a legal service provided by Sandings and MidgettLLP, may include costs for professional staffs and other costs suchas facility costs among others. Professional cost is the main cost(direct labor and forms the largest share in overhead costs(Shukuhian &Yal2012).Paramount Pictures is successful motion picture companies that havesuccessfully waded through harsh economic times from 1930s to 1990senjoying substantial financial successes. The main reason for thefirm success was mainly due to job costing strategy that enhancedhigh-cost low-volume projects (Popesko,2009).
Thismode of costing is mostly used in processing industries such as oilrefineries, chemical, steel, rubber, mining and food production amongothers. Similarly, process costing is used by service providers suchas banks and mailing corporations. Examples of such specificcompanies that apply process costing include Coca-Cola and theInternational Paper company among others. Manufacturing firms haveseveral departments or require several processes before a finishedproduct or service is produced. In this sense, as a given producttraverses the several steps or departments, respective departmentalor step process is transferred to the following department.Transferred costs in the process costing refer to product or serviceincurred in the previous department that is transferred to thefollowing department (Blocher,Stout, Juras & Cokins, 2013).
Ideally,there is less difference between direct material costs andtransferred-costs direct material costs refer to store room costswhile transferred-in cost are costs from another department. In theprocess costing, focus is on processes costs in the production ofproducts or service provision finished product costs are absent. Theobjective of process costing lies in assessing the overall costincurred during the given period or a certain department in theprocessing of a given product or service (Popesko,2012).In this sense, the overall cost of production is measured alongpartially completed and complete units. Companies with homogenousproducts or service provisions are more likely to use the processcosting system. In this case, firms as the automobile, textiles andfood processors use process costing (Shukuhian &Yal,2012).Processing costing appears to be the right means of assessingproducts or services cost in most manufacturing companies. This isbecause the overall costs incurred in various steps or departmentsare accumulated for the final product pricing. In this way, productpricing eliminates or avoids under-pricing errors which maynegatively impact on the profitability of the production process.
Furthermore,process costing is effective in assessing which steps or departmentsmay need production costs re-evaluation. For instance, if a companyis facing serious price competition, through critical assessment ofvarious costs at department process, the production accountantmanager is able to make cost adjustment by increasing or deletingparticular costs (Popesko,2009).For instances, in the production of food products, some processes maybe merged to cut down costs associated with respective departments orsteps. This will eventually reduce the overall price if the finishedproduct (Shukuhian &Yal,2012).
Therefore,process costing is important in service or products pricing whereseveral stages are involved. It is the process costs computationsthat can be used in making pricing changes for final products orservices without incurring lose at particular departments or stagesof production. Process costing has enhanced the profitability of mostfirms such as Txi Cement Company that has remained a dominant playerin the cement industry for decades. Txi Cement uses process costingto calculate the value of units sold in bags this is informed by therationale that it is not economically feasible to assess the accuratecosts of each unit production.
Inconclusion, costing systems have a bearing on the profitability of abusiness entity as they are composed of a collection of controls,processes, forms and reports designed to combine or aggregate, aswell as report to the management pertaining to profitability, costsand revenues. There are variations between the suitability of variedcosting systems in different situations. Job costing systems are morelikely to be used for distinctive products and in extremely smallproduction runs (Oliver & Amacom, 2000). Further, they would beused in billing customers as they detail the actual costs thatprojects that consumers commissioned have consumed. Process costing,on the other hand, would be more suitable in standardized productsand large production runs. It is known to require considerably lessrecord keeping as it aggregates costs.
Blocher,E. J., Stout, D. E., Juras, P. E., & Cokins, G. (2013). Costmanagement: A strategic emphasis (6thEd.).New York, NY: McGraw-Hill/Irwin.
Oliver,L., & Amacom. (2000). Thecost management toolbox: A manager`s guide to controlling costs andboosting profits.New York: AMACOM.
Popesko,B. (2012). Utilizationof process oriented costing systems in healthcareorganizations.InternationalJournal of Mathematical Models and Methods In Applied Sciences.Issue1, Volume 6, pg.200-208.http://m.shonen.naun.org/main/NAUN/ijmmas/17-641.pdf
Popesko,B. (2009). How to manage the costs of service departments usingActivity-Based
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Shukuhian Hojjat&Yal Marzieh(2012).Implementationof Activity-Based Costing in Manufacturing Organization.InternationalJournal of Social and Economic Research.Volume: 2, Issue: 2. Pg. 251-257. Retrievedfromhttp://www.indianjournals.com/ijor.aspx?target=ijor:ijser&volume=2&issue=2&article