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A custom furniture manufacturer uses job order costing to track costs for each piece of furniture. The company uses job cost sheets to record direct materials, direct labor, and allocated overhead for each job. This detailed tracking allows the company to accurately price each piece and assess profitability. While the costing systems are different from each other, management uses the information provided to make similar managerial decisions, such as setting the sales price. Basic Managerial Accounting Terms Used in Job Order Costing and Process Costing Rock City Percussion makes 8,000 hickory sticks per day, four days each week. The sticks made of maple and birch are manufactured on the fifth day of the week. It is difficult to tell the first drumstick made on Monday from the 32,000th one made on Thursday, so a computer matches the sticks in pairs based on the tone produced. Rock City Percussion makes \(8,000\) hickory sticks per day, four days each week. Managerial Accounting For example, General Mills uses process costing for its cereal, pasta, baking products, and pet foods. Job order systems are custom orders because the cost of the direct material and direct labor are traced directly to the job being produced. When a company mass produces parts but allows customization on the final product, both systems are used; this is common in auto manufacturing. Each part of the vehicle is mass produced, and its cost is calculated similarities between job-order costing and process costing include the with process costing. However, specific cars have custom options, so each individual car costs the sum of the specific parts used. Nature of Production Job Order Costing is a system used by companies that produce unique, custom products or jobs. The company uses job cost sheets to record direct materials, direct labor, and allocated overhead for each job. Manufacturing departments are often organized by the various stages of the production process. McNutt was perplexed as to why his bakery was not more profitable year after year. With processing, it is difficult to establish how much of each material, and exactly how much time is in each unit of finished product. This will require the use of the equivalent unit computation, and management selects the method (weighted average or FIFO) that best fits their information system. Texas Monthly reports that Sandy found a way to write unapproved checks in the accounting system. He implemented his accounting system and created checks that were “signed” by the owner of the company, Bob McNutt. McNutt was perplexed as to why his bakery was not more profitable year after year. The accountant was stealing the money while making the stolen checks appear to be paying for material costs or operating costs. Job order costing vs process costing This follows the expense recognition principle because the cost of the product is expensed when revenue from the sale is recognized. There are two methods used to compute the values in the work in process and finished goods inventories. The first method is the weighted-average method, which includes all costs (costs incurred during the current period and costs incurred during the prior period and carried over to the current period). This method is often favored, because in the process cost production method there often is little product left at the end of the period and most has been transferred out. For example, some items that are classified as overhead, such as plant insurance, are period costs but are classified as overhead and are attached to the items produced as product costs. The costing system used typically depends on whether the company can most efficiently and economically trace the costs to the job (favoring job order costing system) or to the production department or batch (favoring a process costing system). The similarities between job order cost systems and process cost systems are the product costs of materials, labor, and overhead, which are used determine the cost per unit, and the inventory values. You’ll also learn the concepts of conversion costs and equivalent units of production and how to use these for calculating the unit and total cost of items produced using a process costing system. Manufacturing Costs The department’s costs would be allocated based on the number of cases processed. For example, assume a not-for-profit pet adoption organization has an annual budget of $180,000 and typically matches 900 shelter animals with new owners each year. Many direct material costs, as the wood in the frame, are easy to identify as direct costs because the material is identifiable in the final product. For example, assume a not-for-profit pet adoption organization has an annual budget of \(\$180,000\) and typically matches 900 shelter animals with new owners each year. Overview of Job Order Costing and Process Costing Process costing is a costing system used to calculate the total as well as the per-unit cost at the end of a large production process, which generally runs through multiple departments. There are no individual or separate job orders in a process costing system. Any costs incurred are due to the whole production process, so the costs are part of the whole process. Understanding the company’s organization is an important first step in any costing system. The sticks are dried, and then sent to the packaging department, where the sticks are embossed with the Rock City Percussion logo, inspected, paired, packaged, and shipped to retail outlets such as Guitar Center. Can you imagine having to determine the cost of making just ONE lego when we can make 1.7 million legos per hour? While still in production, the work in process units are moved from one department to the next until they are completed, so the work in process inventory includes all of the units in the shaping and packaging departments. When the units are completed, they are transferred to finished goods inventory and become costs of goods sold when the product is sold. Understanding the full manufacturing process for a product helps with tracking costs. This video on how

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