Process Costing

1831 Words Sep 5th, 2011 8 Pages
Process Costing Vs. Job Order Costing
Manufacturers use different types of costing systems to allocate production costs to their products and services. Two types of common product costing systems are process costing and job-order costing. While each system applies the same production costs to products, there are distinct variances in the application method.
Process Costing o Process costing applies production costs to products based on the process they go through in the manufacturing process. Each process has a standard amount of overhead, labor and materials that are applied to each batch run the individual manufacturing processes. Reconciliations are used after batches are processed to ensure that all appropriate costs are applied to
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This is sometimes called a process cost worksheet. It details out the materials and labor requirements for each item to be produced. While the products are not produced individually, the material and labor requirements for one unit are calculated based on the typical production quantity.
Standard Costing o Standard costing is often used in conjunction with process costing. Standard costs are determined on an annual basis and use the material and labor requirements from the bill of material along with the standard cost per unit of material or hour of labor to determine a standard unit cost. A standard overhead cost is also calculated annually and included in the product cost.
Variances
o On a regular basis, the standard cost is compared with the actual costs. The difference between the standard cost and the actual cost is called the variance. There are material variances, labor variances and overhead variances. High variances need to be investigated to determine if the product cost is reasonable or if there are production problems.

Explanation of Process Costing
Why Use Job Order Costing o Job order costing system is used in situations where many different products are produced each period.
Job order costing system is also extensively used in service industries. Hospitals, law firms, movie studios, accounting firms, advertising agencies and repair shops all use a variety of job order costing system to accumulate costs for accounting and billing

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