How Job Order Costing is Sub-used for Product Costing Purposes

Question: How Job Order Costing is Sub-used for Product Costing Purposes? Answer: Introduction In a product costing system, the costs incurred in a production process are accumulated and assigned to the organizations final products whereas job-order costing system is used by organizations where goods are produced in batches and these batches have significant differences. Made to order products are manufactured in job order costing and here every product produced is considered as a job. It captures and tracks by job the producing cost for each job including materials, labor and other things involved in a manufacturing environment (Finkler, 1994). More accurate product costing is achieved by computing rates of two different batches instead of the entire plant rate. Advantages Introducing the job order costing system provides the companies with better cost control over the jobs (the specific products produced) that are in production, better inventory valuation for financial statement, better ability to make certain that materials procured for a particular job was used for that purpose, ability to obtain information about how to prevent product stock-outs or stoppage in production and create an appropriate timeline for completing a job (Hansen Mowen, 2003). Job Order Costing Process For instance, let us consider small computer manufacturing companies. Market researchers estimate that these companies control around 25% of the market share in spite of big brand names advertising and cost cutting. Because small PC manufacturers build customized computers ranging from cutting-edge technology machines to older cheaper components for buyers who are budget minded. These manufacturers use the job order costing method to trace the costs of the different systems they produce (Hansen Mowen, 2003). Journal entries illustrating the flow of costs including direct material costs, labor costs and overhead costs of the fabrication department working on several distinct batches during a month is made. The details for posting to the different jobs would be presented in the journal entry explanations. When an individual job is completed, the costs are transferred to the finished goods inventory and once delivered, to the costs of sold goods (Finkler, 1994). All department managers can use completed job order cost sheet to determine how well the costs were managed. The job cost information is used by managers to make decisions and plan and control operations. Manufacturing companies thus incorporate job order costing as a means for controlling materials usage, equipment used in production and the labor costs incurred. Whether an entity is a manufacturer or a service organization tailoring its output according to specific customer needs, company managements find job order costing techniques most helpful in performing managerial functions. It is most useful in determining the costs of goods produced or rendered services in organizations that can attach costs to specific jobs; as the variety of products produced in organization increases, the size of the production lots decrease making job order costing more applicable (Kinney Raiborn, 2009). Job order costing is used in both manufacturing and non-manufacturing units that produce unique or heterogeneous products as cost is accounted by the individual job using a subsidiary account known as the job order cost sheet. References Finkler, S. (1994).Essentials of cost accounting for health care organizations. Gaithersburg, Md.: Aspen Publishers. Hansen, D., Mowen, M. (2003).Cost management. Mason, Ohio: Thomson/South-Western. Kinney, M., Raiborn, C. (2009).Cost accounting. Mason, OH, USA: Thomson/South-Western.