The most common accounting systems in the manufacturing process are job order costing and process costing. These two systems have some similarities and differences as well (Jamal, 2007).
One similarity between the two systems is that they have the basic purpose of allocating labor, raw materials and overhead costs to all products with a view of determining the cost of production per unit of production. Another similarity is that the flow of costs in the two systems is the same. Lastly, the two systems basically use the same accounting aspects such as finished goods, work in process, raw materials and overhead costs (Finkler & Ward, 2007). The differences between the two systems are based on two factors. With process costing, the units produced are almost identical and are produced for a prolonged period of time.
With job order costing; various jobs are done each at a time with each job having different requirements, costs are accumulated per individual jobs, the main accounting document for the system is the job cost sheet and the costs are calculated per each job (Michael, 2012).
Process costing refers to the costing of certain products that have been produced for a prolonged period of time and have similar elements. The costs are calculated by departments and the main accounting document for the system is the department report (Hansen & Mowen, 2007).
The process costing system is most preferred by companies which deal with manufacturing of identical products such as petroleum, chemicals, glass, plastics and paper. This is because these products require almost similar raw materials and are produced in a continuous manner for a prolonged period of time (Khan & Jain, 2007).
The job order costing system is most suitable for companies which produce paints and dyes. The reason is that each type of paint requires different raw materials. For example, the production of red paint may require different raw materials from those of green paint. These companies prefer this system because of its ability to allocate costs to each unit of production. With this system, such companies are able to determine the actual cost of producing the different paints and this helps them in determining the cost of production and the selling price. Companies which manufacture paints usually do so upon getting orders from customers. It does not therefore make sense for them to manufacture too much paint without orders from customers since doing so may make them incur huge loses in case customers fail to order a particular type of paint which is in stock.
Since our company plans to start with only one version of product with a possibility of offering various options in the future, the type of system which makes sense for us is process costing. The reason is that the product would require identical units of production. The process costing will also be preferred because of its simplicity and accuracy in the determination of the costs of production for our product.
The system is also preferred because it would enable our company to achieve standardization in our product. In future; our company would be able to adopt the job order costing which require different materials for production. By this time, our company would have expanded in capacity and would be able to handle complex orders from different clients.
Finkler, S.A., & Ward, D.M. (2007). Essentials of cost accounting for health care organizations. Sudbury, Mass: Jones and Bartlett Publishers.
Hansen, D.R., & Mowen, M. (2007). Managerial accounting. Mason, OH : Thomson/South-Western.
Jamal, N.(2007). Cost management accounting: an introduction. Skudai, Johor : Penerbit Universiti Teknologi Malaysia.
Khan, M.Y., & Jain, P.K. (2007). Management accounting: text, problems and cases. New Delhi: Tata McGraw-Hill.
Michael, K. (2012). Cost Accounting. New York, NY: South-Western Publishers.