Explain job order costing and process costing. What types of businesses use job order costing? What types of businesses use job order costing? Provide examples of each one.
Students must make a minimum of three substantive contributions on two separate days of the learning week to the discussion topic. Post your initial response to the discussion question early in the learning week and then respond to a minimum of two other posts.
—————————————————————1st Classmate post: Job-order costing is a tool used in situations where there are more than one product or service being produced each period (Noreen, Brewer, & Garrison, 2020). I currently work for Walmart E-Commerce. In my line of work, we distribute items like bedframes, hot wheels, baby cribs, grills, canoes, and many other items. The company’s motto for the past few years been “save money live happy”, and to provide the customer with the lowest prices they have invested in manufacturers that sell merchandise exclusively in Walmart stores and now online. The process in the fulfillment center is as follows, orders are placed using the Walmart.com app and then they are processed and shipped by the e-commerce warehouse. The process from the inbound side of the warehouse is, merchandise is received from the vendors, then housed in the warehouse until it is sent to the customer. Walmart must take into consideration the cost of direct labor, direct materials, operational overhead, to properly plan and price items.
In job-order costing is a process that is utilized in the service industries. For example, hospitals, law offices, repair shops are industries that use job-order costing. There are three broad categories in manufacturing: direct material costs, direct labor costs, and operational manufacturing. Job-order cost is a mix of traceable costs such as labor and material, and indirect costs like overhead costs (Haroun, 2015).
The cost of materials is determined by using a document called a bill of materials, which dictates the quantity of each material that is used to make each unit of product (Noreen, et al. 2020). Having this list of materials can help stay on track of how much material must be ordered prior to making the necessary units for the job. The first step is to make agreements with the party ordering the job once reached, the production order is issued. In the production face, the job is documented in a production requisition form, which specifies the quantity and the cost (Noreen, et al. 2020). After the job production requisition form is complete, the job cost sheet is prepared, and it will state the materials, the labor, and the overhead cost of a job (Noreen, et al. 2020).
2nd post classmate: Job Order Costing and Process Costing
Job Order Costing with Examples of Types of Businesses that use the Technique
It is a costing technique that identifies the cost of manufacturing each type of product. It is essential in a manufacturing set up with a variety of product lines that are different from each other as it helps in calculating the cost of a particular job. It is calculated as the summation of direct materials, labor, and applied overhead (Drury, 2013). There are two main types of job order costing namely normal costing and actual costing. Actual costing is complicated and less utilized as it traces both the direct and indirect costs using actual costs which is time-consuming. Conversely, normal costing employs close approximations saving on time whereby the overhead rate is mainly determined by dividing predicted overhead with predicted activity.
Direct material costs are all essential costs incurred in the procurement of raw materials that are used in the manufacturing process whereby their actual costs can be derived from material requisition forms (Drury, 2013). Notably, direct labor is the cost of services offered by the employees in the manufacturing of that particular product with the actual costs being calculated with labor timesheets. It is extensively used in hospitals as well as law and accounting firms as every client is unique and different.
Process Order Costing with Examples of Types of Businesses that use the Technique
It is a costing method that focuses on the process and derives cost by averaging the total cost of the process against the units produced. The three main forms of process costing namely standard cost, weighted average cost, and First in First Out (FIFO) Costing (Shah, 2020). Certain costing aspects play a role in explaining the difference in units between input units and output units. They are normal loss, abnormal gain, scrap value, abnormal loss, and work in progress.
Ordinary loss is the expected wastage under normal operating conditions and could be due to testing and rejects. Abnormal loss is a loss beyond the expected levels and could be due to personnel errors and faulty machinery. Abnormal gain is a scenario where substantial loss is less than ordinary loss (Drury, 2013). Mostly it is attributable to the implementation of new technology. Scrap value entails recovering value out of the outcome of a loss. For example, metal wastages in a steel mill can be sold at a lower value. It is mainly used by petroleum companies and beverage industries.
Drury, C. M. (2013). Management and cost accounting. Springer.
Shah, R. V. (2020). Process Costing using FIFO or Weighted Average-Which is better for Performance Evaluation? The Management Accountant Journal, 55(2), 63-65.
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