KENNETH C HOLMES
APPLIED MANAGEMENT ACCOUNTING
PROFESSOR: JASON CADE
JANUARY 21, 2015
PHASE 2: INDIVIDUAL PROJECT
MEMO
To: Board of Directors and Executive Management Team
From: Kenneth C Holmes
CC: EEC Corporate Financial Analyst
RE: Job-order costing system vs Process costing system, for the new memory chip, which is
preferable?
Which system should EEC use?
The production of the new 1.5 gigabyte memory chip should use the Process Costing
method. The system is quite suitable for manufacturing large quantities of product in a constant
flow. EEC can easily establish a consistent price structure for their products based on their
overall manufacturing costs. Because EEC products pass through several departments, their
managers can easily determine the costs accumulated by each department, determine which
department is responsible for any increased costs, and their source. EEC could make simple
modifications to their products creating a new product offering, knowing the additional cost or
savings from the modification in advance. And lastly, EEC could introduce new products priced
to market more easily, and profitably, knowing the overall production cost to start.
I also recommend the purchase and implementation of an ERP (Enterprise Resource
Planning Software) system to make documentation processing easier, and faster, and the use of
bar codes and RFID (electromagnetic tags) chips which makes tracking costs easier to follow.
The two systems:
Job order costing is a costing system where costs are collected and assigned to units of
production for each individual job. It is a costing method commonly used by manufacturers who
make special orders, customized products, or standard products produced in batches. Process
Costing is a costing system that accumulates production costs by process or department for a
given period of time, and applies costs bases on a unit of merchandise. The system is commonly
used by manufacturers who mass produce large quantities of identical units in a continuous flow.
Job Order Costing formula: Unit Cost = Total Job Cost / Number of Units Produced in Job
Process Costing formula: Unit Cost = Department's Periodic Cost / Number of Units Produced
in the Period
System similarities:
Both systems help managers track performance based on cost-control, efficiency and
productivity over time, job order costing does this for individual and team performance, while
process costing does this by department. Both systems use many of the same journal entries
allowing an easy transition from one to another. Both systems require full documentation of all
material simplifying the process of inventory tracking for IRS tax estimate requirements. Job
order costing helps managers calculate profit earned on individual job, helping them determine
which jobs are worth accepting in the future, while process costing helps managers contain and
track cost, efficiency, productivity and profitability for entire departments, and track their
performance over time. Job order costing uses job cost order sheets for each job which helps
managers track their costs, expenses, and track inefficiencies, where process costing uses reports
completed and reviewed by management to identify inefficiencies in the supply chain, and
address the inefficiencies to minimize costs.
System differences:
Job order costing records the actual materials, labor and expenses, and assigns overhead
at a predetermined rate for each job, where process costing applies a specific amount of raw
material, production labor, and manufacturing overhead to goods and services. Job order costing
tracks the consumption of and purchase of raw materials by customer order, where with process
costing each department documents all purchases and employee salaries consumed during the
production process. Job order costing requires employees to track all materials used, labor costs,
lunch breaks, and hours worked during the job, where process costing simplifies record keeping
by relying on statistical calculations rather than actual inputs. Job order costing can lead to
inaccurate reporting if different departments use different allocation rates, where process costing
ensures every department operates in a uniform manner, enabling all departments to be in sync
with each other. Overhead for job order costing can be difficult to control because it is based on
estimates, where overhead in process costing is based on direct labor and other cost drivers.
Costs with job order costing can be difficult to track if the company works form several locations
and is working on multiple jobs, where process costing tracks costs based on reports filed by
each department. Job order costing creates a great deal of paperwork, requiring many clerical
hours to compile reports, where with process costing each department is assigned a cost center,
and each department submits reports stating all expenses incurred by their department.
Hypothetical process flow
There would be three work stations in the process of production. The first work station
would arrange all the components of the memory chip, the second workstation would assemble
all the components, and the third work station would package the final product for distribution.
Job Order Costing cost tracking and cost drivers:
Each job uses job cost order sheets containing all order information including: total
products ordered (materials used), manufacturing costs, customer shipping data, warranties, and
time needed to complete the job (labor expenses). A Material Requisition Form is completed to
replenish stock of raw material consumed during the production process. Direct costs are
allocated at the end of each project. Indirect costs, production and sales expenses are allocated to
each individual job created during a given production period. Clerical reports are compiled,
classified, and maintained that account for quotations, invoices, sales orders, material receipts,
labor tickets.
The cost drivers include: the cost of all materials used, manufacturing costs, shipping
costs, warranties on finished products, all labor hours and break times, and Management hours.
Process Costing cost tracking and cost drivers:
For starters, each department is assigned a cost center, which is a number/code that
identifies the purchases made by a single department. Each department is required to document
all materials purchased, and record value added for each good to the cost support center. Direct
materials are added at the beginning, during, and/or end of process, direct labor and overhead are
added throughout the process. Each department creates a report stating the supplies purchased
and employee salaries consumed during their production process. These reports are compiled and
reviewed by senior management and help management identify inefficiencies within each
department, and address those inefficiencies to minimize costs. Management must calculate
equivalent units including: beginning WIP, units started and finished, units finished and
transferred, and ending WIP. Management is required to include this information on the
company’s income tax returns, and this information is reported as the work-in-process on a
company’s balance sheet.
The cost drivers include: the conveyor belt (costs incurred each hour), all material used,
all manufacturing costs, shipping costs, all advertising expenses, warranties on all finished
products, selling employee wages, all labor hours and break times, and management hours.
Products EEC can offer using Job Order Costing:
EEC could use Job Order Costing to design and produce custom devices for individual
clients including: custom memory chip / CPU’s/ motherboards/NIC’s, customized computers /
servers/ networking devices, or any computer related product commissioned by a client to meet
their specifications and needs.
Products EEC can offer using Process Costing:
EEC could use Process Costing to manufacture products they currently produce and to
products related to their current line including: memory chips, CPU’s, motherboards, chipsets,
NIC’s, wireless NIC’s, tablets, laptops, and all high volume orders.
There are three types of process costing (used for unit cost calculations).
Weighted average costs: Combines beginning work in process and current period production,
and is the easiest to calculate. It is in used in situations where there is no standard costing system,
or in situations where cost fluctuations are minimal, and there is no need for improving costing
accuracy.
Standard costs: It is the simplest costing process. The process emphasizes current period costs
and production, and eliminates periodic cost computations. Inventories are stated at standard
costs, variance are calculated for materials, labor and overhead, and assigns a normal production
cost to the equivalent units of output each period. The process allows managers to quickly
recognize and investigate significant deviations from expected production costs. The process also
allows for benchmarking with other firms.
First-in first-out costing (FIFO): Separates beginning work in process from current period
production. This process is used when changes in product cost are significant or continuous from
period to period, where management must know the new cost levels to re-price products
properly, to determine if there are any internal costing issues requiring resolution, or to change
manager performance-based compensation.
REFERENCES
Disadvantages of Job Order Costing. (2013). Retrieved from www.management
studyguide.com/disadvantages-of-job-order-costing-system.htm
Henderson, K. (2015). The Advantages of a Process Costing System. Retrieved from Chron.com:
www.smallbusiness.chron.com>...>Process Costing
Ingram, D. (2015). Advantages & Disadvantages of Job Order Costing. Retrieved from
Chron.com: www.smallbusiness.chron.com › … › Process Costing
Lister, J. (2015). How are SG&A Expenses Accounted for in Job Order Costing. Retrieved from
Chron.com: www.smallbusiness.chron.com>SG&A Expenses
Process Costing, Process Costing Accounting. (2015). Retrieved from
www.accountingtools.com/overview-process-costing
Vitez, O. (2015). What are the Advantages & Disadvantages of Process Costing. Retrieved from
Chron.com: www.smallbusiness.chron.com>....>Process Costing