As manufacturing organizations incur costs for Raw Materials and Direct Labor: 1
ID: 2815658 • Letter: A
Question
As manufacturing organizations incur costs for Raw Materials and Direct Labor: 1) How will these costs be associated to the product being made for both Job Order Costing and Process Costing? 2) What impact does the way Raw Materials and Direct Labor are associated to the product being made have on the information provided and the decisions being made by the organization? 3) Provide supportive statements for under what circumstances each of these methods (Job Order Costing, Process Costing) would be more appropriate for internal decision making.
Explanation / Answer
1
Job order costing will include cost of raw materials, direct labour and applied overheads to make the unique product.
A process costing system accumulate costs at an aggregate level for a large batch of products and then allocates them to the individual units produced at the end of an accounting period.
2
It has a direct imapct on arriving at costing of the product. Accurate information is needed by the organisation in order to make a decision whether to accept an order or not and what price to quote to the customer.
When considering to manufacture a specific machine/product order which warrants the use of job order costing method, the organisation will need to know the cost of raw material, labour and overhead that will be applied in completing the manufacture of the specific unit. If specific cost of manufacturing each unit cannot be identified, then the organisation cannot work out the job costing.
When considering to install a manufacturing plant for mass production of the product/order which warrants the use of process costing method, the organisation will need to know the overall cost of raw material, labour and overhead that will be applied in completing the entire process of mass production
3
Job order costing assigns costs to specific units or products. And it is used to accumulate costs at a small-unit level or for very small production runs or unique products. For example, job costing is appropriate for deriving the cost of constructing a custom machine, software, etc The assumption is that cost of each unit or product is specific and identifiable. So accordingly the organisation can make a decision on the fesibility of manufacturing of the product based on Job order costing when considering manufacturing unique or specific product by unit.
Process costing is used to gather costs for standardized products and is used for large production runs. It is a method of costing used mainly in manufacturing where units are continuously mass-produced through one or more processes. Examples can be manufacture of erasers, chemicals etc. The assumption in this method is that the cost of each unit is the same as that of any other unit, so there is no need to track information at an individual unit level. Also in mass production it is impossible to track the cost of a specific unit of product as it moves through the whole process. So the organisation can make a decision on the fesibility of manufacturing of the product based on process costing when considering a mass production of a product.
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