Steven R.Jackson, Roby B.Sawyers & J. Gregory Jenkins, ” Managerial Accounting: a Focus on Ethical Decision Making”, 5th Ed., South- Western, 2009,2008. Chapter 5

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American University in Cairo (AUC) Managerial Accounting ACCT (202)

Dr.Mona ElBannan

Spring 2012

HANDOUT CHAPTER 5 JOB COSTING AND PROCESS COSTING

Product Costing Systems

Companies use various product systems to accumulate, track, and assign the costs of production (direct labor, direct materials, and overhead costs) to the goods produced & services provided by the company.

Reasons behind determining the cost of the product:

1- Pricing decisions made by the marketing manager depend on the product cost information in order to set or fix the optimal price. If the company fix too low price it will gain high market share but achieve low profit. Also, if the company fixes a price which is too high then it will gain low market share and can’t be competitive. 2- Production manager need cost information in order to know whether to buy components or to make it internally.

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American University in Cairo (AUC) Managerial Accounting ACCT (202)

Dr.Mona ElBannan

Spring 2012

Product costing systems

• Job Costing Jobs are the individual units of the product. Companies which manufacture customized production or service use a job costing system, which accumulates, tracks, and assigns costs for each job (unit). Job costing is used in situations in which a customer initiates an order, which pulls the product through the process. • Examples include:          Home Builders Furniture Manufacturers Custom Printers Hospitals determining patient costs CPA firms Audit firms Brokerage firms Law Firms Printer for wedding invitations

 Process Costing Companies that produce a homogeneous product produced on a continuous basis use process costing system. It is used by companies that forecast the demand and push a product through manufacturing process. Instead of accumulating, tracking and assigning costs to each unit, it accumulates, tracks, and assign cost to each process as the product pass through each process. • Examples include:  Oil refineries  Breweries  Paint manufacturer (blending process & pouring process)  Paper Manufacturers  Bread baker (mixing process, baking process, & Slicing process)

• Operations Costing Operations Costing is a hybrid of job and process costing. Used by companies that make products in batches i.e. large number of products that are standardized within a batch. • Examples include:  Automobile Manufacturers  Clothing Manufacturers

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American University in Cairo (AUC) Managerial Accounting ACCT (202)

Dr.Mona ElBannan

Spring 2012

Summary: Job costing Type of Product custom Operations costing Standardized within batches Process costing Homogeneous

Examples

Construction, Automobiles and Beverages, oil movies, studios, mobile clothing refineries, paint, hospitals, print manufacturers paper, rolled steel. shops, CPA & Law Firms.

Job Costing  Direct Materials Direct materials costs include the costs of primary materials used in production. Measuring direct material cost is relatively an easy task, however, how should the cost of the cracked material or spoilage be treated. Normal Spoilage: Results from the regular operations of the production process, such as broken glasses and its cost should be added on the direct material cost for the job being produced. Abnormal Spoilage: Results from improper handling, poorly trained craftspeople, or equipment that is in poor condition. Abnormal spoilage should be expensed as a period cost or included in manufacturing overhead, where the cost is spread across all jobs completed during the period. It should not be treated as direct material cost.  Direct labor Direct Labor is calculated by multiplying a wage rate for each employee by the number of hours that each employee works on each product.  Manufacturing overhead It is the most difficult cost to track and assign to products because of its indirect nature. Includes costs such as rent, depreciation, repairs and maintenance, utilities, indirect labor,...
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