LO A product costing system is a set of procedures used to account for an orga- Distinguish between the

2 LO A product costing system is a set of procedures used to account for an orga- Distinguish between the

nization’s product costs and to provide timely and accurate unit cost information two basic types of product cost- for pricing, cost planning and control, inventory valuation, and financial state- ing systems, and identify the

ment preparation.

information that each provides. 씰 The product costing system enables managers to track costs throughout the

management process. 씰 It provides a structure for recording the revenue earned from sales and the

costs incurred for direct materials, direct labor, and overhead. Two basic types of product costing systems have been developed: job order

costing systems and process costing systems. Table 17-1 summarizes the charac- teristics of both costing systems.

TABLE 17-1 Characteristics of Job Order Costing

Job Order Costing System

Process Costing System

and Process Costing Systems

Traces manufacturing costs to a

Traces manufacturing costs to processes,

specific job order

departments, or work cells and then assigns the costs to products manufactured

Measures the cost of each

Measures costs in terms of units

completed unit

completed during a specific period

Uses a single Work in Process

Uses several Work in Process

Inventory account to summarize

Inventory accounts, one for each process,

the cost of all job orders

department, or work cell

CHAPTER 17 Costing Systems: Job Order Costing Businesses that make special-order

items, such as the kitchen cabinets shown here, use a job order cost- ing system. With such a system, the costs of direct materials (e.g., the wood used in framing the cabinets), direct labor, and overhead (e.g., insur- ance and depreciation on tools and vehicles) are traced to a specific batch of products or job order. All costs are recorded on a job order cost card.

Courtesy of George Peters/ istockphoto.com.

A job order costing system is used by companies that make unique or special-order products, such as personalized ice cream creations, specially built cabinets, made-to-order draperies, or custom-tailored suits.

씰 It uses a single Work in Process Inventory account to record the costs of all

job orders. 씰 It traces the costs of direct materials, direct labor, and overhead to a specific

batch of products or a specific job order (i.e., a customer order for a specific number of specially designed, made-to-order products) by using job order cost cards.

A job order cost card is usually an electronic or paper document on which all costs incurred in the production of a particular job order are recorded. The costs that a job order costing system gathers are used to measure the cost of each completed unit.

A process costing system is used by companies that produce large amounts

of similar products or liquid products or that have long, continuous production o In job order costing, costs

Study Note

runs of identical products. Makers of paint, soft drinks, candy, bricks, paper, and r are traced to jobs; in process

gallon containers of ice cream would use such a system. g

costing, costs are traced to 씰 It first traces the costs of direct materials, direct labor, and overhead to processes, production processes. departments or work cells and then assigns the costs to the products manufac-

tured by those processes, departments, or work cells during a specific period. 씰 It uses several Work in Process Inventory accounts, one for each process,

department, or work cell. In reality, few production processes are a perfect match for either a job order

costing system or a process costing system. The typical product costing system

Job Order Costing in a Manufacturing Company