Reference no: EM13339936

Within any company, large or small, correct costing is considered a vital aspect of the accounting process. Selecting process costing or a job order costing system is based off of what type of product the organization is going to sell or process [Muse, 2013]. A job order costing system can be seen in manufacturing businesses like for furniture, printing, or shipbuilding, which all use this type of system. The process costing method is noticeably used in industries where raw material is changed into an identical product like toilet paper, flour, or cereals which are created in a continuous rotation, in other words, like on an assembly line [Wild & Shaw, 2012]. As an example Ford Motor Company builds vehicles, which are built on an assembly line - the process costing method would work best in this organization. Or a service organization like the American Red Cross which produces multiple things would benefit from using the job-order costing system.

Both methods have an overall basic goal, to align materials, labor, and overhead costs during the development of products [Wild & Shaw, 2012]. As well as present a method for calculating unit product cost. Each are consistent in using identical manufacturing accounts, which include manufacturing overhead, raw material, work in process, and finished goods. 

Various things differ between process costing and job-order costing and are obvious in each area of their processing methods. If an organization where to produce multiple jobs that were different a job-costing method would be used because these types of jobs have distinctive production needs. Process costing on the other hand, an organization would utilize this method when producing a non-stop type cycle of identical products [Wild & Shaw, 2012]. Also when using process costing it collects costs by individual department and then names each costs so that when they flow through each department during a cycle they will be recognizable. This type of data collection is not done in job costing.

Knowing from the start that my CFO is going to start out her new production line with one item but will eventually build onto it with a variety of other options, my recommendation would be for her to choose a job-ordering costing method within her accounting processes. Reason being, as stated before, this method will track specific costs with specific jobs, making it easier to trace cost associated with direct and indirect material. It will also provide managers with data to calculate profit earned per separate job so that they can quickly determine whether or not a specific job is worth continuing in the future. And finally implementing a new a costing method in mid-stream of production would not be cost effective for the company. The overhead costs to re-vamp a new system, production slow-down, costs of training will all have a negative effect in revenue earned if this change is done after the fact. It should be put in place from the beginning so as to keep the products moving and the profits flowing.

References:

Wild, J., Shaw, K. [2012]. Process Costing and Analysis. Managerial Accounting