Question: Financial accounting classes cover how merchandising companies, such as Sears and Lowe’s, account for the cost of the goods that they purchase from a supplier and later sell to a customer. These companies simply record the cost of the purchase in an inventory account and account for any returns and allowances, discounts, and shipping costs. Once the merchandise is sold, the related inventory costs are transferred to cost of goods sold. However, manufacturing companies are different. How do manufacturing companies account for inventory at different stages of production?
Answer: Manufacturing companies like Custom Furniture Company, Ford, and IBM don’t have it quite as easy as merchandising companies. They must account for the materials, labor, and other manufacturing costs that go into building the product. The process of accounting for manufacturing costs depends on which costing system a company uses—job costing or process costing.
Question: We define a jobAn activity that results in a unique product, one easily distinguished from other products. as an activity that produces a unique product—one that can be easily distinguished from other products. For example, building a custom home is a job because the home is unique and easy to distinguish from other homes. An accounting firm’s provision of tax services to a client is another example of a job. How does a job costing system help companies that produce unique products or jobs?
Answer: A job costing systemA system that records revenues and costs for each job. records revenues and costs for each job. Because each job at Custom Furniture Company results in a unique product and has different material and labor requirements, the company uses a job costing system.
Tracking revenues and costs for each job is important for several reasons:
Question: Job costing may work for builders of custom furniture and tax professionals, but does job costing make sense for a company that produces soft drinks? Imagine trying to track costs for each can of soda produced. A job costing system would not be appropriate for this type of company. A different costing system, called process costing, would be a better fit. Which types of companies use this type of system?
Answer: Companies that produce identical units of product in batches using a consistent process track costs with a process costing systemA costing system used by companies that produce identical units of product in batches employing a consistent process.. Table 2.1 "Job Costing Versus Process Costing" lists some products and services that require the use of process costing versus job costing, and Figure 2.1 "Examples of Job Costing and Process Costing" shows an example of each. This chapter focuses on job costing. We explore process costing further in Chapter 4 "How Is Process Costing Used to Track Production Costs?".
Table 2.1 Job Costing Versus Process Costing
|Job Costing||Process Costing|
|House painting services||Paint|
Identify whether each company listed in the following would use job costing or process costing.
Solutions to Review Problem 2.1