1. Job-Order Costing Systems
  • Operational Suitability: Designed for businesses that manufacture unique, custom-built products or provide bespoke services (e.g., custom yacht building, printing services, construction projects, audit engagements).
  • Mechanics: Costs are accumulated separately for each distinct “job” using a Job Cost Sheet. Direct materials, direct labor, and applied overhead are charged directly to the specific job number as it moves through production.

2. Process Costing Systems
  • Operational Suitability: Designed for industries that produce continuous, mass-market runs of homogenous, indistinguishable items (e.g., oil refining, chemical processing, soft drink bottling, cement manufacturing).
  • Mechanics: Costs are accumulated by entire production departments or processing centers over a specific time period, rather than by individual jobs.

3. Equivalent Units of Production (EUP)
In process costing, a primary challenge is evaluating partially completed units remaining in work-in-process (WIP) inventories at month-end. To resolve this, units are mathematically converted into an equivalent number of fully completed units.
Calculations under Weighted-Average Method
The weighted-average method blends work done in prior periods with work done in the current period:

EUP = Units completed and transferred out + (Ending WIP × % completion)

Calculations under FIFO Method
The FIFO method strictly segregates production and costs by period, focusing purely on current-period efforts:

EUP = (Beginning WIP × % to complete) + Units started & completed + (Ending WIP × % complete)

 
PreviousNext