“Costing systems aim to report cost numbers” that will show the total cost of resources used to produce an item for sale (Horngreen, Datar, Foster, Rajan, & Ittner, 2009). The type of products that a company produces and the different types of products a company sell has an effect on which costing system should be chosen. Each job that is different requires a different costing system and thus the name Job-Costing System. Some companies produce the same one or few items over and over again and this process thus has the name Process-Costing Systems. “Many companies have costing systems that are neither pure job costing nor pure process costing but have elements of both “ (Horngreen, Datar, Foster, Rajan, & Ittner, 2009). Thompson Fabrication produces items based on customer requests. Johnson Ice Cream Company produces two brands of ice cream and on separate assembly lines.
Each product that Thompson Fabrication produces is based on a customer request and is unique in nature. The process of creating two different brands of ice cream is a cost object of a product that is produced in mass quantities or in this case two different types of products that are independently made on a different assembly line process. Thompson Fabrication was asked to bid on a contract to produce 10 metal tables for a chemical lab. They must estimate the amount of cost to set a price that will be profitable and one that will be lower than the competition. They will first have to identify the problem of how much will it cost to produce the ten metal tables.
The first thing they will have to do is gather information on the direct materials, labor, and overhead costs that will be used to create the ten tables. They will have to make an educated guess about the future based on the information they can gather and based on prior knowledge or other jobs that were similar in nature to this one. Most companies never stop learning how to control costs and manufacturing or construction companies often keep logs to better obtain an ideal on how to better price future jobs by keeping a log of the work while it is in progress. This helps make more accurate cost assessments of projects with similar nature and the accuracy of costing is an ongoing saga that just never ends it is constantly improved upon no matter how simple a job or process is. This is due to the fact that the best way to increase sales is to reduce price and that can only be done by finding better ways to reduce cost or increase quality.
Many different jobs are worked on within each period and there is job cost sheet for each job at Thompson Fabrication. The job costs sheet will list the direct materials, labor, and overhead costs expected for the production of the ten tables. Job Order Costing is used in situations or companies where each job is different. This Job Order Cost Sheet will be the key document accumulation of costs by a job and will be saved for reference in case a similar job comes up.
The first step in the process is to identify the job which is ten tables, the direct materials, amount or cost of labor, and add any overhead costs including the amount of time to complete the job cost sheet which is an administrative overhead cost. The allocation of overhead costs is not an exact science. The supervision, administrative, building, power, and other overhead costs associated with the production of the ten tables will have to be allocated based on or compared to a standard such as the number of labor hours used or the amount of floor space used to create ice cream. We can do this by taking the total amount of overhead costs divided by the total labor hours or total costs of all products produced in a given period of time divided by the overhead costs an allocated to a unit. It is different in every scenario and the goal to allocate overhead costs appropriately is also a never ending goal to be as accurate as possible.
Process Costing Systems include a process that is repeated over and over again between departments. “Under process costing, we accumulate costs by department rather than by order, assign these costs uniformly to all units that pass through the department during a period” (Accounting for Management.com, 2010). They keep track of the costs of each department and the whole costs are based on an average. This average can be affected by the number of units due to the fact that there are always fixed and variable costs. Although there are two different products being produced they are on a different assembly line. These two products have different amounts of direct materials and direct labor costs that will probably cause the chocolate ice cream to be more expensive to produce than the vanilla ice cream. Both of these costing systems were often called a Traditional Costing System since they both rely on an allocation of direct materials, direct labor, and overhead costs allocated based on some standard like labor hours or number of gallons of ice cream produced.
Direct Materials is one of the important costs that must be calculated in determining costs. Often beginning inventory, purchases, work in process inventory, and ending inventory must be used to calculate the total costs for a period. There is also salaries payable that must be allocated a job or process in order to accurately cost direct labor. The total overhead costs may never be figured out till all bills are received or paid due to the fact that even a simple phone call is an overhead costs associated with the overall production or cost of an object. Overhead costs are hard to allocate and a constant goal of being as accurate as you can be is the approach you have to have towards overhead costs. You also have to take into consideration the possibility that one product may costs more to produce than another or you will underpriced some items and overprice others.
The information I need for two companies in the juice industry is not easily available. Most sites I have visited have asked for money for this information. The SEC should have financial data available for two juice companies. However, companies do not often give out cost management or management accounting information available to the public.
Accounting for Management.com. (2010). Difference Between Job Costing and Process Costing. Retrieved February 18, 2011, from Accounting for Management.com: http://www.accountingformanagement.com/similarities_and_differences_betw…
Horngreen, C., Datar, S., Foster, G., Rajan, M., & Ittner, C. (2009). Cost Accounting (Thirteenth ed.). Upper Saddle River, NJ: Pearson-Prentice Hall.