Running Head: JOB ORDER COSTING AND PROCESS COSTING 1

JOB ORDER COSTING AND PROCESS COSTING

STUDENT NAME

UNIVERSITY OF THE PEOPLE

BUS 5110: Written Assignment Unit 2

April 19, 2017

JOB ORDER COSTING AND PROCESS COSTING 2

“JOB ORDER COSTING AND PROCESS COSTING”

Job Order Costing

First of all, I would like to choose “Reliable Tailors” as a company that uses Job Order

Costing, owned by May and Aung Hla, located in Yangon, Capital of our country, Myanmar

(formerly known as Burma). This company makes two types of products Myanmar Jacket or

Taik Pone and Longyi for men.

Now, I would like to describe here in more detail how the business owner uses job order

costing and how the job order costing would help the business owners to manage their business.

By using job order costing, the company can easily calculate total cost of each product they

produced and set a reasonable selling price for each of them. For our instance, Reliable

Tailors, the company can apply job costing system to calculate cost of its each product,

Myanmar Jacket or Taik Pone and Longyi for men. The company can allocate its Direct

Materials Costs to specific products by using the ‘Materials Requisition Form’ which indicates

that how many direct materials are put into the production department of the particular product

from raw materials store. For instance, fabric $2,400 and buttons $960 for Taik Pone are

requested and fabric $4,000 are requested for Longyi, etc. (Walther, 2012)

Similarly, the company can allocate its Direct Labour Costs to specific products by using

the ‘Daily Time Sheet’ of each employee which indicates that the employee spent how much

time for a particular product. For instance, an employee, Mr. Smith, daily spent 2 hours for

sewing Taik Pone, 4 hours for sewing Longyi, etc. By such way, the company can record total
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direct labors costs for each employee and that of all employees of a particular product. (Walther,

2012)

Then, the company can also add its overhead expenses to specific products by using

‘Overhead Absorption Rate (OAR)’ which is calculated total applied factory overhead divided

by total applied factory activity such as total direct labor hours, total direct material costs, total

direct labor costs, total prime costs, etc. whichever is appropriate. Once we calculated overhead

absorption rate, and then we can add absorbed overhead (i.e. OAR x Applied Activity in each

product) to the particular product. For instance, suppose that overhead absorption rate we

calculated is $2 per direct labor hours. Then, we can calculate absorbed overhead for each

product: $2 per DL hour x 1,000 DL hours = $2,000 for Taik Pone, $2 per DL hour x 1,500 DL

hours = $3,000 for Longyi, and so forth. (Walther, 2012)

It is sure that, unless we exactly know total costs of each product, the company can never

set selling price for a particular product. Therefore, it is very important to know well total costs

of each product. Once the know total costs of each product, then the company can set selling

price by simply adding required profit to total costs of each product.

Simplest Job ‘Costing Form for each product’ can be shown as follows:

$ per Taik Pone $ per Longyi

Direct Material xxx xxx

Direct Labour xxx xxx

Direct Expense xxx xxx

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Prime Cost YYY YYY

Add: Absorbed Factory Overhead xxx xxx

Production Cost ZZZ ZZZ

Add: Non-Manufacturing Overhead xxx xxx

Total Cost ` TTT TTT

Add: Profit xxx xxx

Selling Price SSS SSS

Process Costing

Unlike Job Order Costing (which is used in producing unique products or jobs), Process

Costing is used where it is not possible to identify separate units of production, or jobs, usually

because of the continuous nature of the production processes involved. Therefore, the types of

companies use process costing are the companies that produce similar or identical units of

product in batches employing a consistent process, for instance, a chewing gum manufacturer, a

facial tissue manufacturer, a cereal producer, a dairy farm, and so forth. (Heisinger and Hoyle,

2012)

Here, I would like to describe about a chewing gum manufacturer, Aung Kaung’s

business, named as “Best Chewing Gum”, as a company that uses Process Costing. I would like

to describe here in more detail how the business owner uses process costing and how the process

costing would help the business owners to manage their business.

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In this company, the business owner keeps the process account to track its product costs,

in which direct materials cost, direct labor costs, and manufacturing overhead would be debited.

If there is any partly completed product, the business owner needs to calculate the equivalent

units (i.e. notional whole units which represent incomplete work, and which are used to

apportion costs between work in progress and completed output) of its production so as to

determine the cost of a completed unit. The value of opening work-in-progress would be debited

and that of closing work in progress would be credited in the process account.

In valuing opening work in progress, the business owner might use two methods, namely,

FIFO (First in First Out) Method, and AVCO (Weighted Average Cost) Method. For those two

methods, FIFO inventory valuation is more common than the weighted average method in

practice. However, if the business owner knows only the degree of completion of each element

in its opening inventory, but do not know the value of each cost element, then he could only use

the FIFO method in valuing its opening work in progress. Otherwise, the business owner knows

only the value of each cost element in its opening inventory, but do not know the degree of

completion of each element, then he could only use the AVCO method in valuing its opening

work in progress. If both of them are known, the business owner should use FIFO method

because, as I described above, FIFO inventory valuation is more common than the weighted

average method in practice.

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In addition, the business owner should note that losses may occur in its process. If a

certain level of loss is expected, this is known as ‘normal loss’, which is no need to calculate

cost, but the scrap value of those normal losses would be saved the cost of production. If losses

are greater than expected, the extra loss is known as ‘abnormal loss’, and it is necessary to

calculate a cost. If losses are less than expected, the difference is known as ‘abnormal gain’,

which is necessary to treat as a negative cost in calculating product costs. Thus, the business

owner could use process costing to track his product cost and to manage his business efficiently

and effectively. (Heisinger and Hoyle, 2012)

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References

Heisinger K. and Hoyle J. B. (2012)., Accounting for Managers (v.1.0): Chapter 2 - How is Job

Costing Used to Track Production Costs., Retrieved from

http://2012books.lardbucket.org/pdfs/accounting-for-managers/s06-how-is-job-costing-

used-to-tra.pdf

Heisinger K. and Hoyle J. B. (2012)., Accounting for Managers (v.1.0): Chapter 4 - How is

Process Costing Used to Track Production Costs?., Retrieved from

http://2012books.lardbucket.org/pdfs/accounting-for-managers/s07-how-is-process-

costing-used-to-tra.pdf

Walther, L.M. (2012). Principles of Accounting. Logan, UT: Utah State University - Chapter

Chapter Nineteen: Job Costing and Modern Cost Management Systems., Retrieved from

http://www.principlesofaccounting.com/chapter19/chapter19.html

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