To begin with job costing, it entails accumulating the cost of production associated with a specified unit or a collection of units. In other terms, it accumulates the costs incurred with respect to individual jobs. Therefore, companies opt for job costing system in situations where they are able to identify separate products or where the goods are tailored to fit particular customer needs (Fisher & Krumwiede, 2015). A good example to elaborate job costing is the manufacture of a custom-design car. The cost of all the labor involved in the specified car will be captured on a time sheet followed by compilation on a cost sheet for the job. The same would be done for all the other materials used for that car.
On the other hand, process costing entails cost accumulation for comparatively long production runs involving products that are impossible or extremely difficult to distinguish from one another. In other words, cost accumulation is in accordance with the departments or the processes that a product goes through in its path to completion (Eldenburg, Wolcott & Cook, 2016). A good example is a company dealing with the manufacture of paints.
From the above description, one can point out some significant differences in the characteristics of job costing and product costing when considering certain variables including:
Product uniqueness; job costing is applied for unique products, in that companies that use job costing applies it on several unique jobs with distinct production requirements within each period of production while process costing us used for standardised products, in that companies that apply process costing deals on a single product for long periods or on a continuous basis.
Procedures for accumulating costs; in job costing, cost accumulation is by individual jobs whereas in process costing cost accumulation is by department or process.
Keeping of records; job costing involves comparatively much more record keeping since material and time is charged to specified jobs while process costing involves less record keeping since it aggregates costs.
Work in progress inventory accounts; for job costing each job has its own work in progress inventory account while for process costing each department or process has work in progress inventory account.
Impacts of job costing and process costing in the accounting work
From the above characteristics of job costing system, it is significant in management since it allows accountants to conveniently compute the profit earned on individual jobs. It, therefore, assists in ascertaining the feasibility of certain jobs to be pursued in the future. It is thus very crucial especially for businesses that deal in highly custom work, like the consultants and the contractors in the construction industry. On the other hand, process costing system is also significant since it enables accountants to get detailed information regarding production statistics of workgroups or individual departments. Therefore it is highly applicable in the case of continuous manufacturing especially in utility companies and factories (Weygandt, Kimmel & Kieso, 2015).
The Coca-Cola Company is an ideal company that might apply both the process costing system and job costing system. It applies process costing in the production of the Coca-Cola drink which is a standard product meat for acquisition by all customers in the end. The stages of production begin with the mixing of ingredients such as sugar, water, and other secret ingredients. The second stage is bottling and then inspection labeling and packaging (Coca-Cola Company, Home Page). Work in progress runs all through from the first stage of mixing then bottling and final inspection, labeling and packaging. After the products have gone through all the three stages they are transferred to the warehouse and cost recorded in the finished goods inventory. And once they are shipped to retail store the cost is transferred to the cost of goods sold account from the finished good inventory account (Borges Lopes, Freitas & Sousa, 2015). Regarding the job costing system, the company can use it to track direct labor, direct materials, and production overhead cost since they are distinct from each other.
The difference in cost between the service industry and manufacturing industry
The first difference in the accounting practices is the terminologies used and the development of the cost of goods sold account (Cusumano, Kahl & Suarez 2015). For the case of a manufacturing company, the cost of manufactured goods is the summation of overhead, material, and labor costs. While for a service company the, the cost of service provided is principally the wages charged on labor and overhead costs.
The second difference is the product cost, for manufacturing industry companies the product cost is associated with the actual act of manufacturing a product (Cusumano, Kahl & Suarez 2015). On the other hand, for service Industry Company the product cost is equated to the cost of delivering a specified service such as office supplies and professional salaries.
The third difference is the variance analysis factors, for manufacturing industries companies the factors include direct labor, direct materials, fixed manufacturing overheads, and variable manufacturing overheads (Cusumano, Kahl & Suarez 2015). In the case of service industry companies, they equate direct materials to office equipment, computers, and other office supplies necessary for completing the desired service. For direct labor, they use the salary of the professionals involved in providing the service.
The fourth difference is evident in the volume variance analysis. The volume variance is the production volume budgeted for less the actual volume produced (Cusumano, Kahl & Suarez 2015). For the manufacturing company, it is the volume of products manufacture while for the service company it is the number of services delivered.
Benefits of service industry costing
An ideal example of Service Company is the Walt Disney Company which is among the biggest players in the entertainment industry. Each and every movie that they produce represents a specific job. They allocate costs based on the labor and material they use in producing the movie (Bohas, 2015). There are various benefits they enjoy in employing a costing system (Management Study Guide 2018)
First, the costing system enables the company to appraises the jobs that they are supposed to take. If they do not use a costing system they will not have enough data to prove whether a certain job would be profitable or not.
Secondly costing system assists in the provision of empirical data to the service company. Over a period of time, it proves to be a crucial database, due to the thousands of jobs that are recorded in the system. These jobs can be used by the company as empirical data to assist in conducting an in-depth assessment of self-efficiency.
Thirdly, the costing system enables the company to identify the jobs that they are competitive at and those which they are not. The system allows for critical analysis of the equipment cost rework cost associated with specified jobs which assists the company financially.
In conclusion, the above-mentioned benefits are only achievable if the costing system is appropriately implemented. It might be fairly difficult to maintain costing systems in the service industry but there are tremendous financial benefits that accompany the system.
Bohas, A. (2015). Transnational Firms and the Knowledge Structure: The Case of the Walt Disney Company. Global Society, 29(1), 23-41.
Borges Lopes, R., Freitas, F., & Sousa, I. (2015). Application of lean manufacturing tools in the food and beverage industries. Journal of technology management & innovation, 10(3), 120-130.
Coca-Cola Company, "Home Page," http://www2.coca-cola.com/ourcompany/bottlingtoday.
Cusumano, M. A., Kahl, S. J., & Suarez, F. F. (2015). Services, industry evolution, and the competitive strategies of product firms. Strategic management journal, 36(4), 559-575.
Eldenburg, L. G., Wolcott, S. K., Chen, L. H., & Cook, G. (2016). Cost management: Measuring, monitoring, and motivating performance. Wiley Global Education.
Fisher, J. G., & Krumwiede, K. (2015). Product costing systems: finding the right approach. Journal of Corporate Accounting & Finance, 26(4), 13-21.
Management Study Guide, 2018. Job Costing and Service Firms: https://www.managementstudyguide.com/job-costing-and-service-firms.htm
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2015). Financial & managerial accounting. John Wiley & Sons.
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