Q1: There are two different types of cost accounting systems: Job order cost systems and process cost systems. How does management decide whether to use a job order cost system or a process cost system in any given manufacturing situation? Explain. Job order cost system is used in situations where many different products are produced each period. For example, a Levi Strauss clothing factory would typically make many different types of jeans for both men and women during a month. A particular order might consist of 1,000 stonewashed men’s blue denim jeans, style number A312. This order of 1,000 jeans is called a job. In a job-order costing system, costs are traced and allocated to jobs and then the total costs of the job are divided by the total number of units in the job to arrive at an average cost per unit. Process cost system used in companies that produce many units of a single product for long periods. Examples include producing paper at Weyerhaeuser, refining aluminum ingots at Reynolds Aluminum, mixing and bottling beverages at Coca-Cola, and making wieners at Oscar Mayer. These are all homogeneous products that flow through the production process on a continuous basis. Because all units are the same, each unit produced during the period is assigned the same average cost. This costing technique results in a broad, average unit cost figure that applies to homogeneous units flowing in a continuous stream out of the production process. To decide whether which costing system should be applied, it is depends on that organization itself. If that organization is producing products like clothing, repair shops and hospitals, so they have to use a form of job-order costing. These companies have readily identifiable raw material costs that apply directly to each unit produced or serviced. Labor is also identifiable to each product because of the differences in the products produced. Most companies use job-order costing because of the various products they produce and the different manufacturing processes needed for each product. Job-order costing is a method that applies overhead, labor and material costs to different products, based on how much of each production material is used. Some items may use more labor, while other products may require more raw materials. This method applies costs based on the cost of each portion of materials used, rather than through the production process used to manufacture the good. Manufacturers who produce several different types of goods will use job-order costing. On the other hand, organization that needs to use process costing primarily applies to the production of homogeneous goods through repeated manufacturing processes. Products that use process costing include beverages, food, nails and screws. These items go through individual processes with costs applied to each batch of produced goods. Manufacturers must be careful in streamlining their manufacturing process to ensure that each batch has production costs applied in similar amounts. So, process costing applies production costs to products based on the process they go through in the manufacturing process. Each process applies a standard amount of overhead, labor and materials to each batch. Companies may also use resolutions after batch processing to ensure that manufactured goods include all appropriate costs. Finally, process costing is the best costing method when producing large amounts of similar items. This method applies costs at the production process level, creating simple cost allocations for manufacturers. Each department applies overhead as the products move through the individual production processes. Meanwhile, Job-order costing may use several different types of overhead application processes, based on the cost driver of the manufacturer. Accountants select cost drivers as the best way to apply overhead, based on production methods. The numbers of direct labor hours, machine hours or activities are common cost...
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