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Chapter 4: Problem 2

How does a job-costing system differ from a process-costing system?

Short Answer

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A job-costing system assigns costs to specific custom-made products or services in small-scale production, tracking expenses on a per-job basis. It is commonly used in industries such as construction, custom manufacturing, and professional services. In contrast, a process-costing system allocates costs to large-scale, continuous production or services, averaging costs over a large number of identical products. This system is mostly used in industries producing homogeneous goods or services in large quantities, like oil refining, food production, or pharmaceutical manufacturing. The main difference between the two systems is the way they allocate costs and their suitability in different production contexts.

Step by step solution

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1. Define Job-costing System

A job-costing system is a method for assigning costs to specific custom-made products or services, usually in small-scale production or projects. This system tracks costs on a per-job basis, thus identifying the expense for each specific job. It is mostly used in industries such as construction, custom manufacturing, and professional services.
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2. Define Process-costing System

A process-costing system is a method for allocating costs to large-scale, continuous production or services. This system tracks expenses across various processes or departments and averages the cost over a large number of identical products or services. It is mostly used in industries that produce homogeneous products or services in large quantities, such as oil refining, food production, or pharmaceutical manufacturing.
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3. Context of Use: Custom vs. Mass Production

Job-costing systems are more suitable for businesses that produce customized goods or services, where each product or service has unique specifications and costs. On the other hand, process-costing systems are more suitable for businesses that produce homogeneous goods or services in large quantities, where costs can be averaged across all units.
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4. Tracking Costs: Individual Jobs vs. Departments/Processes

In a job-costing system, costs are traced and allocated to individual jobs, giving managers a clear understanding of the cost of each project or product. In a process-costing system, costs are traced and allocated to departments or processes, which then allocate a portion of the cost to each unit of output. This provides an average cost per unit, making it more challenging to determine the cost of individual items.
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5. Flexibility vs. Simplification

Job-costing systems offer more flexibility, as they can handle the unique costs associated with each custom job. However, this comes at the expense of more complexity when tracking expenses. On the other hand, process-costing systems provide a simplified approach to allocating costs by averaging expenses across all units of output. This makes them more straightforward to manage, but less precise in determining the cost of individual items. In conclusion, the main difference between a job-costing system and a process-costing system is in the way they allocate costs and the context where they are more suitable to be used. A job-costing system is tailored to small-scale, custom production with unique costs for each job, while a process-costing system is designed for large-scale, homogeneous production with averaged costs allocated across all units.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Job-Costing System
In the world of cost accounting, understanding a job-costing system is crucial for businesses that engage in custom production. Job-costing systems are designed to allocate costs to specific jobs or projects rather than spreading them across more homogeneous outputs. These systems are perfect for industries like construction, custom manufacturing, and specialized services that often deal with unique products or projects.

By using a job-costing system, each project's costs are tracked individually. This means businesses can easily see what resources were consumed by each job, providing a clear picture of profitability and cost control. This approach is ideal if a company regularly takes on distinct projects that require varied materials and labor.
  • Custom-focused: Ideal for individual, unique projects.
  • Cost identification: Tracks costs for specific jobs.
  • Common industries: Often used in construction and custom manufacturing.
Process-Costing System
On the other hand, a process-costing system is well-suited for those businesses involved in mass production of homogenous products. This type of costing system averages costs over several processes or departments and then spreads these costs across a large output of similar products.

Industries like food production, oil refining, and pharmaceuticals are typical users of process-costing systems. By tracking costs by department rather than by individual jobs, businesses can streamline their accounting, allocating an average cost per unit. While this approach lacks the precision of job-costing in tracking individual unit costs, it simplifies management for operations where products cannot be distinguished from one another.
  • Mass production: Suitable for high-volume, similar product outputs.
  • Cost tracking: Averages costs across processes.
  • Common industries: Used in food production and pharmaceuticals.
Custom Production vs. Mass Production
The choice between custom production and mass production dictates the type of costing system a business should use. Custom production, which creates products with unique specifications, generally uses job-costing systems to ensure accurate cost allocation for each project. This allows for detailed reporting on project expenses for clients and internal analysis.

Mass production, however, thrives on efficiency and uniformity. Products are created in large quantities with little variation, so process-costing systems are employed to simplify cost management. By averaging costs, businesses can keep track of the overall efficiency and productivity without the need for detailed expense reports for each unit.
  • Custom production: Best for unique, one-off products.
  • Mass production: Ideal for large quantities of uniform products.
Cost Allocation Methods
Cost allocation is critical in determining the financial health of business operations, and the method used can greatly affect this outcome. In job-costing systems, costs such as materials, labor, and overhead are directly tied to individual jobs, allowing for precise tracking and reporting. This system provides flexibility since managers can adapt the cost allocation to fit each project's unique circumstances.

In contrast, process-costing systems rely on predetermined departmental or process overhead rates that are applied uniformly to all products. This simplifies cost management in production environments where products are essentially indistinguishable. Each method has its strengths, with job-costing offering precision and flexibility, while process-costing offers simplicity and efficiency.
  • Job-costing: Allocates costs to specific jobs for precision.
  • Process-costing: Distributes costs uniformly for simplification.

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Most popular questions from this chapter

Dakota Products uses a job-costing system with two direct-cost categories (direct materials and direct manufacturing labor) and one manufacturing overhead cost pool. Dakota allocates manufacturing overhead costs using direct manufacturing labor costs. Dakota provides the following information: $$\begin{array}{lcc} & \text { Budget for 2017 } & \text { Actual Results for 2017 } \\ \hline \text { Direct material costs } & \$ 2,250,000 & \$ 2,150,000 \\ \text { Direct manufacturing labor costs } & 1,700,000 & 1,650,000 \\ \text { Manufacturing overhead costs } & 3,060,000 & 3,217,500 \end{array}$$ 1\. Compute the actual and budgeted manufacturing overhead rates for 2017 . 2\. During March, the job-cost record for Job 626 contained the following information: Direct materials used Direct manufacturing labor costs \(\$ 55,000\) \(\$ 45,000\) Compute the cost of Job 626 using (a) actual costing and (b) normal costing. 3\. At the end of 2017 , compute the under-or overallocated manufacturing overhead under normal costing. Why is there no under- or overallocated manufacturing overhead under actual costing? 4\. Why might managers at Dakota Products prefer to use normal costing?

Overview of general ledger relationships. Estevez Company uses normal costing in its job-costing system. The company produces kitchen cabinets. The beginning balances (December 1 ) and ending balances (as of December 30 ) in their inventory accounts are as follows: $$\begin{array}{lcc} & \text { Beginning Balance 12/1 } & \text { Ending Balance 12/30 } \\ \hline \text { Materials Control } & \$ 4,200 & \$ 17,000 \\ \text { Work-in-Process Control } & 13,400 & 18,000 \\ \text { Manufacturing Department 0verhead Control } & \- & 188,000 \\ \text { Finished Goods Control } & 8,800 & 38,800 \end{array}$$ a. Direct materials purchased during December were \(\$ 132,600\). b. cost of goods manufactured for December was \(\$ 468,000\). c. No direct materials were returned to suppliers. d. No units were started or completed on December 31 and no direct materials were requisitioned on December 31 e. The manufacturing labor costs for the December 31 working day: direct manufacturing labor, \(\$ 8,600\), and indirect manufacturing labor, \(\$ 2,800\) f. Manufacturing overhead has been allocated at \(110 \%\) of direct manufacturing labor costs through December 31 1\. Prepare journal entries for the December 31 payroll. 2\. Use T-accounts to compute the following: a. The total amount of materials requisitioned into work in process during December b. The total amount of direct manufacturing labor recorded in work in process during December (Hint. You have to solve requirements \(2 b\) and \(2 c\) simultaneously c. The total amount of manufacturing overhead recorded in work in process during December d. Ending balance in work in process, December 31 e. cost of goods sold for December before adjustments for under- or overallocated manufacturing overhead 3\. Prepare closing journal entries related to manufacturing overhead. Assume that all under- or overallocated manufacturing overhead is closed directly to cost of Goods Sold.

Describe the seven steps in job costing.

Job costing, ethics. Joseph Underwood joined Anderson Enterprises as controller in October \(2016 .\) Anderson Enterprises manufactures and installs home greenhouses. The company uses a normal-costing system with two direct- cost pools, direct materials and direct manufacturing labor, and one indirect- cost pool, manufacturing overhead. In 2016 , manufacturing overhead was allocated to jobs at \(150 \%\) of direct manufacturing labor cost. At the end of \(2016,\) an immaterial amount of underallocated overhead was closed out to cost of goods sold, and the company showed a small loss. Underwood is eager to impress his new employer, and he knows that in 2017 , Anderson's upper management is under pressure to show a profit in a challenging competitive environment because they are hoping to be acquired by a large private equity firm sometime in 2018 . At the end of 2016 , Underwood decides to adjust the manufacturing overhead rate to \(160 \%\) of direct labor cost. He explains to the company president that, because overhead was underallocated in 2016 , this adjustment is necessary. cost information for 2017 follows: Anderson's revenue for 2017 was \(\$ 5,550,000,\) and the company's selling and administrative expenses were \(\$ 2,720,000\) 1\. Insert the given information in the T-accounts below. Calculate the following amounts to complete the T-accounts: a. Direct materials control, 12/31/2017 b. Manufacturing overhead allocated, 2017 c. cost of goods sold, 2017 2\. Calculate the amount of under-or overallocated manufacturing overhead. 3\. Calculate Anderson's net operating income under the following: a. Under- or overallocated manufacturing overhead is written off to cost of goods sold. b. Under- or overallocated manufacturing overhead is prorated based on the ending balances in work in process, finished goods, and cost of goods sold. 4\. Underwood chooses option 3 a above, stating that the amount is immaterial. Comment on the ethical implications of his choice. Do you think that there were any ethical issues when he established the manufacturing overhead rate for 2017 back in late \(2016 ?\) Refer to the IMA Statement of Ethical Professional Practice.

Distinguish between actual costing and normal costing.
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