Question

Classify whether each one is JOB ORDER COSTING SYSTEM or PROCESS COSTING SYSTEM? And Why

1. Famous Cheese Spread was created by a family in a small town in Nebraska. Its website says it sells to around 60 grocery stores in central and eastern Nebraska and also wholesale to Affiliated Midwest, who distributes the product to more than 850 stores in 16 states. Their one product consists of a blend of American cheese, cheddar cheese, salad dressing, pimentos, green peppers, and secret seasonings. It is sold in 16-oz. size and 32-oz size, plastic containers. Although the website says that the largest part of sales occur in October through December, the business does manufacture its product year-round, and has been featured at the Nebraska State Fair.

2. WoodsRus company produces crown moulding from a special variety of cedar trees that grows near their town. Business has increased to the point where the two owners of the firm stay busy six days a week, all year long, producing a steady supply of one specific style of moulding to fill a large, longstanding order contract covering multiple years from a national home improvement store chain that likes the firm's work because of the consistency they achieve in meeting the specifications for identical product manufacturing with their product output.

3. Jeff Grassy designs and installs custom lawn and garden irrigation systems for residential properties in a six-county area during the months of April through October each year. He has his own employees and purchases the variety of needed materials, based on the particular job, from a national irrigation systems manufacturing company.

4. Mitt Muffler is known through the region as having the best shop for putting dual exhaust systems on pickup trucks and other vehicles. He purchases components, but configures the overall exhaust system according to the type of vehicle, the use of the vehicle, and the vehicle owner's preferences.

5. Sleepytime Favorite is a small, west-coast manufacturer of pillows. They run an assembly line staffed by talented seamstresses and pillow packers from the surrounding communities and rural areas. To try to ensure stable employment for its workforce, the company specializes in only two types of pillows and tries to keep its assembly line running at nearly full capacity for five workdays a week all year long. The firm has a large warehouse that can hold any excess production during sales slumps. The warehouse also provides a buffer inventory to cover any unexpected jumps in sales.

Answer 1

1. It is process costing system. This is because production involves many steps and each of these individual steps may be treated as an individual process. Job order costing will be unsuitable in this case as the product is manufactured continuosly and it is not tailor made according to the customers' preferences.

2. It is process costing system. As explained earlier, process costing system is most appropriate for this example because of the various steps involved in the manufacturing process. It is also mentioned that the products are of specific style. This means that the products are not tailor made according to the customers' preferences. Therefore, job order costing is not appropriate in this case.

3. It is job order costing system. Since the lawns and garden irrigation systems are custom made to suit the customers' homes, it would be most suitable to follow job order costing system. Work at each customer's house can be treated as individual job orders, and since purchases are made according to each job order, the profitability of each individual job orders can be ascertained.

4. It is job order costing system. It is mentioned here that work done depends upon the type of vehicle, the use of the vehicle, and the vehicle owner's preferences. So each vehicle worked on can be considered as a separate job order. Hence it would be most appropriate to employ job order costing system.

5. It is process costing system. The company only produces two kinds of pillows and it has assembly lines to manufacture the pillows. It will be suitable for the company if it employs process costing since there are various processes involved in the manufacture of a pillow. The product moves from one process to another in a sequential manner, while its percentage of completion grows as it passes through each process.