The Costing Systems

This article will not include pictures of cats and dogs. Perhaps in the near future, depending on the mood, I might include one. But right now, I’m fighting that urge which is I think more difficult than reviewing the prerequisites of this material and introducing you to the two kinds of costing systems.

Grab a coffee and read on.

Cost Accounting is an area in accounting concerned in cost determination, analysis, and control for the purpose of financial reporting and decision making. This area of accounting supplements financial accounting by providing details of cost figures found in generic financial statements (statements that are prepared by using general standards, i.e. GAAP). It also enables management accounting is processing (cost) data which will be used in analysis and decision making. In short, we need cost accounting for financial reporting and decision making.

Cost system- also known as the perpetual approach, accounts for the flow of costs in detail with the intention of providing unit costs and inventory cost for periodic reporting. Costs are accumulated by products and batches, or by processes and departments.

(Review periodic vs perpetual)

Know the following: (these are easy checklist of topics for you to read. It would improve your understanding in the succeeding topics if you have an idea beforehand. I would create a different entry for these but in the meantime, please read them on your own.

1.      Chart of accounts used by manufacturing firms

2.       Controlling accounts vs subsidiary accounts

3.       Stores accounts and store ledger cards

4.       Work in process account and the job cost sheet (for job order costing) and cost of production report (for process costing)

5.       Finished goods and the finished goods ledger card

6.       Other controlling accounts such as Factory overhead control, Selling Expense control, General and Administrative expense control, etc.. ( these are supported by subsidiary ledgers and may be used for both periodic and perpetual inventory systems because they do not affect value of your inventories.

7.       How (actual/applied) factory overhead is charged to production.

8.       How to dispose over/underapplied factory overhead

9.       The factory ledger and the general ledger ( main office/ factory reciprocal accounts.)

10.   Transfer voucher (inter-office dr/cr memo)

11.   Review your cheat sheets from the Non-cost System

Job Order Costing and Process Costing

Cost accumulation and reporting may be done by products or batches ( using the job order costing), or by departments (using the process costing system). Let’s have a quick comparison of these two costing system.

	Job Order costing	Process costing
As to the nature of products	Products or batches can be easily identified and differentiated from each other (heterogeneous). Each product has its own unique features due to different processes involved.	Products or batches are not distinguishable from each other. (homogeneous) Products go through the same continuous process resulting to similar characteristics.
Examples:	Customized shoes, made to order boats, houses, fabricated factory machines,	Beverages, cosmetic products, canned goods, refined sweeteners.
Cost accumulation and reporting	By Job orders	By departments or processes
When is unit cost computed	Upon completion	At the end of the accounting/cost period (usually at the end of the month)
Computation of unit cost	Production cost per job Number of units	Departmental cost Equivalent units of production
Subsidiary record for work in process	Job order cost sheet	Cost of production report
PRIMARY OBJECTIVE?	Compute the cost per job	Compute the costs charged to each production process

Below is a summary of the Job order cost flow, please take note of the key entries. Understanding the cost flows together with these primary entries would facilitate future discussion. Study them, memorize them, visualize them, put them in your index cards, have them tattooed at the back of your hands, put them at the cover of your economics and psychology notebooks… I know you get the point.

And below is the Process costing cost flow

In addition, below is an example of a job order cost sheet… this will be used in job order costing.

And below is just a sample portion of Cost of Production Report, feel free to google a better example and insert it here…  coz right now I am fighting the urge to insert a picture of my cat playing with my kids toys… (I will update this post as soon as I can)

I hope this short cheat sheet helps. Leave a comment and let me know what do you want me to add in the discussion.

Happy reading!