Job Order & A ; Process Order Costing
Two systems used in fabricating to track and find costs on single manufactured merchandises are occupation order bing and process order bing. There are similarities between the two systems such as utilizing the same information for costs. This includes natural stuff costs, work in procedure, and finished goods. Besides, the flow of how costs are tracked is similar. Both systems are designed to supply a method for finding what it costs to bring forth a merchandise. This information is necessary in order to find merchandise pricing and to keep control of production costs.
Job order costing is used when the fabrication procedure and merchandise is occupation specific or varies from one occupation order to the following. Costss are tracked by the specific occupation order, and so each occupation order ‘s costs are separated by the figure of merchandises manufactured. This method is used to find the mean cost of each merchandise manufactured. Tracking costs per occupation is more hard than tracking per procedure. Since the merchandise varies or is order particular, the costs will be different between orders or between merchandises, therefore the records for the costs of each occupation have to be controlled and tracked per the occupation or merchandise. The fabrication costs that are normally tracked include the direct natural stuffs used ; the direct labour used in fabrication, assembly and packaging, and any fabricating operating expense that is associated with the production of the peculiar merchandise. In order to understand how occupation bing plants, an apprehension of each cost and how it is tracked is necessary.
In order to fabricate a merchandise, it is common for there to be a parts list of some type ( material list, measure of stuffs, or cut list ) with the stuffs, constituents, and measures needed for doing that merchandise. These are the direct stuff costs for the merchandise. For illustration, in order to bring forth a individual flicker stopper, it is necessary to hold the stuffs and constituents that are needed to assembly that flicker stopper. Spark stoppers are made up of a centre electrode with a threaded part and an dielectric. Each constituent is made up of specific stuffs that are brought together to do the finished merchandise. The costs for the stuffs and constituents can be tracked through purchase orders for the stuffs and so determined on a per-part or component footing.
The costs for direct labour can be tracked in a similar manner to the stuff costs by tracking the labour hours used per constituent ( when there are machined parts ) and per assembly ( where the parts are put together to do a completed merchandise ) . Labor for packaging of the finished merchandise can besides be tracked in this manner. A common method for tracking of stuffs and labour through the fabrication procedure is through the usage of saloon codifications and work orders or travellers which are attached or kept with the stuffs, constituents, and finished assembly as it moves through the fabrication installation. For each merchandise being manufactured it will necessitate the input of what stuffs are used based on the parts list and who worked on the constituents through designation Numberss. This information is entered into the organisation ‘s stuff demands planning ( MRP ) system which is used to both program and track stuff and labour used per each merchandise that is produced. As each measure of the fabrication procedure is completed, the stuff and labour clip is recorded electronically through saloon codifications or can be recorded manually on the travellers or into the MRP system through computing machine Stationss. The information is so accessible to accounting for finding the costs per merchandise and can track the existent labour and stuff costs that was required to bring forth merchandise. This same methodological analysis is used to track indirect costs such as care and killing which is portion of fabricating operating expense.
In order to acquire a complete image of the costs involved per each merchandise manufactured, it is necessary to track the fabrication operating expense costs associated with the overall fabrication procedure. This is non an easy undertaking since it is an indirect cost and it does non track good per merchandise produced. However, overhead costs must be tracked as they are portion of the costs in bring forthing merchandise. Manufacturing overhead can include several different elements including what is required to keep the fabrication machinery, wages of directors, and technology costs. Sing how varied these costs are, that there may be fluctuations due to production degrees, and that they are non straight attached to any one peculiar merchandise ( except possibly technology costs, which could be at least partly attached to a specific merchandise, depending on the merchandise ) , it can be an overpowering undertaking to try to delegate costs to single merchandise. A successful method for carry throughing this undertaking is through an allotment procedure.
The allotment procedure involves making an “ allotment base ” that can be used as a set sum for operating expense. This sum or rate can so be assigned to the merchandise in the same manner as direct labour hours. A common method is to delegate a “ preset operating expense rate ” . This is accomplished by taking the entire estimated fabrication operating expense costs and spliting it by the sum estimated figure of single merchandise that will be produced for a occupation or production order. This deliberate rate can so be assigned per merchandise at the same rate as the direct labour hours. In this manner trailing of overhead costs per merchandise produced can be accomplished.
Even though occupation order costing can be slightly complex in its procedure of tracking costs, direction has the advantage of seeing all of the costs involved in fabricating the merchandise. This is valuable information that can be used through analysis to find where costs are altering so that control of those costs can be exercised. Control of costs is critical in fabrication in order to increase efficiency and advance better net income degrees.
In contrast to occupation order costing is the procedure order bing method. Process order costing is used when merchandises are manufactured utilizing a uninterrupted procedure or when mass bring forthing a individual or similar merchandise. For illustration, an oil refinement company will utilize procedure costing in its cost accounting processs. Since in a refinement procedure it is uninterrupted from natural stuff to complete processed merchandise, it is highly hard if non possible to place specific labour, stuff, and overhead costs to a specific order since the processing of oil into refined merchandises is done in a uninterrupted procedure. Any designation with specific occupation orders is lost because of the nature of the procedure itself. The lone manner costs can be assigned is through the totaling of costs per procedure over a specific clip frame and interrupting down that cost per the measure sold such as the figure of gallons processed and sold of gasolene or Diesel fuel refined during a three month period. The totaling of the procedure costs is done through a production study that summarizes the production costs incurred during a specific clip period. This is a extremely efficient manner of accumulating the cost information produced in mass production or uninterrupted procedure fabrication. In mass production, the manufactured parts or assembly costs are assigned per section or by work centre, depending on the flow of merchandise through the fabrication installation. As each section or work centre completes its portion of the fabrication procedure, its accrued costs are so passed to the following section of work centre.
There are four chief bing countries utilized in procedure costing. These include the cost of production study, departmental unit costs, work-in-process costs, and costs that can be transferred to other sections or to finished goods. The procedure bing system has two chief features ; these are the cost of production study which is an accretion of the entire production costs and is used to find per unit costs, and entire cost charged to a section. The section costs will besides include work-in-process costs and reassign costs. The method for garnering the information for stuffs, labour, operating expense, and processing costs are done through standard cost accounting. Once this information has been gathered, it is analyzed per section or by procedure and charged to the associated section. From this information, the sum produced by a section or work centre during a specific clip frame can be measured in footings of the sum of the existent units produced. This can be compared to estimated production and past production to find if production ends are being met and if costs are higher or lower than what was estimated. This analysis can be used to command costs during the fabrication procedure.
Now that the two systems have been explained in more item, it will be easier to find what will be the more applicable bing procedure that should be used in SAC ‘s new merchandise line. From the scenario given, SAC is sing utilizing occupation order bing for the new merchandise line. The current costing system used by SAC is process occupation bing since the merchandise lines are virtually indistinguishable in stuffs, parts, and assemblies. The new merchandise has a new design and will be specifically tailored to the racing industry ( CTUO, 2010 ) . But, the natural stuffs will be similar if non the same as SAC ‘s other merchandise lines. And, the differences are in the design and fabrication method which means there will be a separate line for the new merchandise ( this makes it easier to track costs when fabricating a specific merchandise is done with specific machinery and specific procedures ) .
With this information, several factors need to be considered. The first is that the current system in topographic point is process order costing. The demands for occupation order costing and trailing of each procedure is different from procedure order bing. Part of the costs for implementing the new merchandise line will be in puting up the new costing system. This will necessitate making tracking or work orders and cost sheets that are attached to each occupation order. It will necessitate workers to register labour hours per occupation. There will be developing costs as the new system is implemented. There will necessitate to be alterations in tracking costs from sections to the specific occupation. Planning and gauging will be different because it will be per occupation alternatively of per procedure. Presently there are no accounting or direction employees with occupation order bing experience every bit good as workers with per occupation fabrication experience. These are all important jobs that will necessitate to be addressed. If SAC is willing to put the clip, attempt, and resources necessary to implement a occupation order bing system for a individual merchandise line and if the projected net incomes from this new merchandise line justify the extra costs of implementing a new costing system, than it would be worthwhile to utilize occupation order bing since it is a more efficient manner of tracking costs if the new merchandise line will be managed as a particular per occupation order merchandise. If, nevertheless, the new merchandise line is manufactured in the same mass production manner as the other merchandise lines with merely shorter tallies with minor differences between tallies, than it would non be worth the cost of change overing to occupation order costing.