The Issue of Job Order Vs Process Costing in Managerial Accounting of a Small Business
A primary role for cost accounting is to know the cost of products or services in a small business. Like the other methods utilized: average and specific identification or first-in, first-out; last-in, there are different ways needed to value the inventory as well as calculate the product cost for a manufacturing or service setting. One is the financial analysis. Another would be the product inventory report. Whereas, the first-out method is utilized to know inventory valuation and cost of products sold.
Both job order and process costing are the two vital cost systems in accounting. In particular, a job order costing system is utilized by manufacturing businesses that make small quantities or sets of identifiable products or services. What constitutes a "job" from an accounting standpoint? This can be categorized by the steps of its production cycle: planned for but not yet started, manufacture in process, and completed.
Another primary product costing system is the process costing system. It is utilized by manufacturing companies that is able to produce large quantities of homogeneous products like bricks, gasoline, detergent and breakfast cereal. Using these in a situation, the output will be homogeneous. Hence, for a certain time, one unit of output cannot be readily identified with specific input costs, so that there is possible cost flow assumption. This allows accountants from companies to assign costs to products, even if there is no research on actual physical flow of units.
Upon comparing the said two factors in business analysis, the continuous flow of units and the indistinguishable units are seen. Which one is better? The process costing allows a more complicated method. While job order costing is just right for companies endowing products or services that are only produced in limited quantities according to consumer demands and specifications. In contrast, process costing allows an accumulation and assign of costs to the products in manufacture. This costing method is the choice by makers like candle crafters, candy products, bricks, gasoline, paper, and food products as well as a lot more.
Another point to consider is that a job cost sheet is not needed for process costing, because its main tasks are geared on the departments. Instead, a production report is utilized. It is a summary of number of products moving through a department in occasions, and it also allows a computation of unit costs. Moreover, this report can show what costs were exhausted by the department and what disposition was done on these costs. The department production report is a vital document in a process costing system.