The two principal types of cost accounting systems are:
Job Order Costing System: This system is used when products or services are produced in distinct, identifiable units or batches. Each job or order is treated as a separate entity, and costs are accumulated and assigned to specific jobs or orders. This system is commonly used in industries such as construction, custom manufacturing, and professional services.
Process Costing System: This system is used when products or services are produced in a continuous, mass production process. Costs are accumulated and assigned to departments or processes rather than individual jobs or orders. This system is commonly used in industries such as chemical manufacturing, food processing, and oil refining.
The Job Order Costing System provides for a separate record of each particular quantity of product that passes through the factory. This is because each job or order is treated as a distinct entity, and costs need to be tracked and allocated to specific jobs or orders. By maintaining separate records, management can accurately determine the cost of each job or order, which is essential for pricing and profitability analysis.
The Process Costing System accumulates the costs for each department or process within the factory. This is because process costing focuses on the overall production process rather than individual jobs or orders. Costs are allocated to departments or processes based on the quantity of output produced. This system is used when there is a continuous flow of production, and it allows management to track costs at each stage of the production process, making it easier to identify inefficiencies or areas for improvement.
The predetermined factory overhead rate can be used in job order cost accounting to assist management in pricing jobs by providing a standardized basis for allocating overhead costs to individual jobs. This rate is calculated by estimating the total factory overhead costs for a specific period and dividing it by an estimated activity level, such as direct labor hours or machine hours. By applying this predetermined rate to each job based on its actual usage of the allocation base, management can determine the overhead cost to be assigned to each job. This information is crucial in accurately determining the total cost of a job, which helps management make informed decisions regarding pricing strategies, ensuring profitability, and evaluating the financial performance of each job. It provides a consistent method for allocating overhead costs and allows for better cost control and decision-making.
