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Job Order Costing or Process Costing Decision (Process Costing Methods)

Your CFO, in her initial work, needs to decide whether to set up a job order costing system or a process type costing system. She has asked you to make a recommendation based on the following information. You plan to meet with her in the morning. Imagine you were tasked to write a response to the following, and provide support for your recommendation:

- Compare and contrast job order costing to process costing methods.

- What kind of system works best in what kinds of companies?

- What kind of system makes sense for your company, given that you plan to start with only one version of your product but at some point in the future may offer a variety of options?

Solution Preview

- Compare and contrast job order costing to process costing methods.

- What kind of system works best in what kinds of companies?

Process costing is appropriate when the goods produced are interchangeable. That is, they are identical. An example would be Coca-Cola syrup. Each ounce is the exact same. Also, process costing techniques show you how to figure the cost per unit when you have partially completed batches of identical units. The costs are associated with the period, typically in one work in process account (or one per department in a multi-stage process), not individual units.

Job costing is appropriate when products or batches differ from each other. Job costing permits you to assign different materials, labor and overhead based on actual work performed, services consumed and materials used for each particular job/order/batch/unit. An example would be custom home building. You would have one work in process account for each home. You would not expect the units to be ...

Solution Summary

Response compares and contrasts job order and process costing methods in 641 words (about two pages) with the discussion in everyday language suitable for a novice. Examples are given and three website references are provided.

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