Question

Why might a company choose a process costing system over a job order costing system? How are the two systems similar, and how are they different?

Answer 1

As organizations that use work order costing maintain track of materials and other resources for each project item, this method often necessitates more thorough record keeping than a process costing. However, in systems that use process costing, each production or process department has its own inventory account and aggregates expenses.

How are the 2 systems similar?

• Both approaches serve the same fundamental objectives: to provide a framework for calculating unit product cost and to assign material, labor, and overhead costs to items.
• The same fundamental manufacturing accounting principles are used by both systems, including production overhead, raw materials, work in progress, and finished goods.
• In both systems, the cost flow through the manufacturing accounts is essentially the same.

What are the differences between the two?

There are two reasons why work order costing and process costing differ from one another. The first is that a process costing system has a flow of units that is essentially continuous, and the second is that these units are interchangeable. Since each order is just one of many that are filled from a continuous flow of almost identical units from the manufacturing line, it makes no sense to try to identify materials, labor, and overhead costs with a specific order from a customer (as we do with job order costing). Under process costing, costs are accumulated by the department as opposed to orders, and they are then uniformly distributed to all units that go through the department over the course of a time period.

The fact that process costing does not employ the job cost sheet since its emphasis is on departments is another distinction between the two costing methodologies. For each department that works on items, a production report is created as opposed to a task cost sheet. The production report fulfills a number of purposes. It gives a summary of how many units pass through a department in a given time frame and computes unit costs. Additionally, it displays the expenses incurred by the department and the decision made regarding such expenses. In a process costing system, the department production report is a crucial document.

Therefore, above are all the differences and similarities between the 2 systems.

For more information on the Costing system, refer to the given link:

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