Two systems used in manufacturing to track and determine costs
Job Order & Process Order Costing
Two systems used in manufacturing to track and determine costs on individual manufactured products are job order costing and process order costing. There are similarities between the two systems such as using the same information for costs. This includes raw material costs, work in process, and finished goods. Also, the flow of how costs are tracked is similar. Both systems are designed to provide a method for determining what it costs to produce a product. This information is necessary in order to determine product pricing and to maintain control of production costs.
Job order costing is used when the manufacturing process and product is job specific or varies from one job order to the next. Costs are tracked by the specific job order, and then each job order’s costs are separated by the number of products manufactured. This method is used to determine the average cost of each product manufactured. Tracking costs per job is more difficult than tracking per process. Since the product varies or is order specific, the costs will be different between orders or between products, therefore the records for the costs of each job have to be controlled and tracked per the job or product. The manufacturing costs that are commonly tracked include the direct raw materials used; the direct labor used in manufacturing, assembly and packaging, and any manufacturing overhead that is associated with the production of the particular product. In order to understand how job costing works, an understanding of each cost and how it is tracked is necessary.
In order to manufacture a product, it is common for there to be a parts list of some type (material list, bill of materials, or cut list) with the materials, components, and quantities needed for making that product. These are the direct material costs for the product. For example, in order to produce a single spark plug, it is necessary to have the materials and components that are needed to assembly that spark plug. Spark plugs are made up of a center electrode with a threaded portion and an insulator. Each component is made up of specific materials that are brought together to make the finished product. The costs for the materials and components can be tracked through purchase orders for the materials and then determined on a per-part or component basis.
The costs for direct labor can be tracked in a similar way to the material costs by tracking the labor hours used per component (when there are machined parts) and per assembly (where the parts are put together to make a completed product). Labor for packaging of the finished product can also be tracked in this way. A common method for tracking of materials and labor through the manufacturing process is through the use of bar codes and work orders or travelers which are attached or kept with the materials, components, and finished assembly as it moves through the manufacturing facility. For each product being manufactured it will require the input of what materials are used based on the parts list and who worked on the components through identification numbers. This information is entered into the organization’s material requirements planning (MRP) system which is used to both plan and track material and labor used per each product that is produced. As each step of the manufacturing process is completed, the material and labor time is recorded electronically through bar codes or can be recorded manually on the travelers or into the MRP system through computer stations. The information is then accessible to accounting for determining the costs per product and can track the actual labor and material costs that was required to produce product. This same methodology is used to track indirect costs such as maintenance and cleanup which is part of manufacturing overhead.
In order to get a complete picture of the costs involved per each product manufactured, it is necessary to track the manufacturing overhead costs associated with the overall manufacturing process. This is not an easy task since it is an indirect cost and it does not track well per product produced. However, overhead costs must be tracked as they are part of the costs in producing product. Manufacturing overhead can include several different elements including what is required to maintain the manufacturing machinery, salaries of managers, and engineering costs. Considering how varied these costs are, that there may be variations due to production levels, and that they are not directly attached to any one particular product (except perhaps engineering costs, which could be at least partially attached to a specific product, depending on the product), it can be an overwhelming task to attempt to assign costs to individual product. A successful method for accomplishing this task is through an allocation process.
The allocation process involves creating an “allocation base” that can be used as a set amount for overhead. This amount or rate can then be assigned to the product in the same way as direct labor hours. A common method is to assign a “predetermined overhead rate”. This is accomplished by taking the total estimated manufacturing overhead costs and dividing it by the total estimated number of individual product that will be produced for a job or production order. This calculated rate can then be assigned per product at the same rate as the direct labor hours. In this way tracking of overhead costs per product produced can be accomplished.
Even though job order costing can be somewhat complex in its process of tracking costs, management has the advantage of seeing all of the costs involved in manufacturing the product. This is valuable information that can be used through analysis to determine where costs are changing so that control of those costs can be exercised. Control of costs is critical in manufacturing in order to increase efficiency and promote better profit levels.
In contrast to job order costing is the process order costing method. Process order costing is used when products are manufactured using a continuous process or when mass producing a single or similar product. For example, an oil refining company will use process costing in its cost accounting procedures. Since in a refining process it is continuous from raw material to finished processed product, it is extremely difficult if not possible to identify specific labor, material, and overhead costs to a specific order since the processing of oil into refined products is done in a continuous process. Any identification with specific job orders is lost because of the nature of the process itself. The only way costs can be assigned is through the totaling of costs per process over a specific time frame and breaking down that cost per the quantity sold such as the number of gallons processed and sold of gasoline or diesel fuel refined during a three month period. The totaling of the process costs is done through a production report that summarizes the production costs incurred during a specific time period. This is a highly efficient way of amassing the cost information produced in mass production or continuous process manufacturing. In mass production, the manufactured parts or assembly costs are assigned per department or by work center, depending on the flow of product through the manufacturing facility.
There are four main costing areas utilized in process costing. These include the cost of production report, departmental unit costs, work-in-process costs, and costs that can be transferred to other departments or to finished goods. The process costing system has two main characteristics; these are the cost of production report which is an accumulation of the total production costs and is used to determine per unit costs, and total cost charged to a department. The department costs will also include work-in-process costs and transfer costs. The method for gathering the data for materials, labor, overhead, and processing costs are done through standard cost accounting. Once this information has been gathered, it is analyzed per department or by process and charged to the associated department. From this information, the amount produced by a department or work center during a specific time frame can be measured in terms of the amount of the actual units produced. This can be compared to estimated production and past production to determine if production goals are being met and if costs are higher or lower than what was estimated. This analysis can be used to control costs during the manufacturing process.
Now that the two systems have been explained in more detail, it will be easier to determine what will be the more applicable costing process that should be used in SAC’s new product line. From the scenario given, SAC is considering using job order costing for the new product line. The current costing system used by SAC is process job costing since the product lines are virtually identical in materials, parts, and assemblies. The new product has a new design and will be specifically tailored to the racing industry (CTUO, 2010). But, the raw materials will be similar if not the same as SAC’s other product lines. And, the differences are in the design and manufacturing method which means there will be a separate line for the new product (this makes it easier to track costs when manufacturing a specific product is done with specific machinery and specific processes).
With this information, several factors need to be considered. The first is that the current system in place is process order costing. The requirements for job order costing and tracking of each process is different from process order costing. Part of the costs for implementing the new product line will be in setting up the new costing system. This will require creating tracking or work orders and cost sheets that are attached to each job order. It will require workers to register labor hours per job. There will be training costs as the new system is implemented. There will need to be changes in tracking costs from departments to the specific job. Planning and estimating will be different because it will be per job instead of per process. Currently there are no accounting or management employees with job order costing experience as well as workers with per job manufacturing experience. These are all significant problems that will need to be addressed. If SAC is willing to invest the time, effort, and resources necessary to implement a job order costing system for a single product line and if the projected profits from this new product line justify the additional costs of implementing a new costing system, than it would be worthwhile to use job order costing since it is a more efficient way of tracking costs if the new product line will be managed as a special per job order product. If, however, the new product line is manufactured in the same mass production fashion as the other product lines with simply shorter runs with minor differences between runs, than it would not be worth the cost of converting to job order costing.
If you are the original writer of this essay and no longer wish to have the essay published on the UK Essays website then please click on the link below to request removal:
More from UK Essays
- Free Essays Index - Return to the FREE Essays Index
- More Accounting Essays - More Free Accounting Essays (submitted by students)
- Example Accounting Essays - See examples of Accounting Essays (written by our in-house experts)
Need help with your essay?
We offer a bespoke essay writing service and can produce an essay to your exact requirements, written by one of our expert academic writing team. Simply click on the button below to order your essay, you will see an instant price based on your specific needs before the order is processed: