there are two renowned costing system i.e., job order costing system or process costing system used by manufacturing or service organization. you are required to highlight the suitability, advantages and disadvantages of each costing system in context of organizations working in pakistan.
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Answer:
Concept:
Small-business owners have many options when choosing a manufacturing accounting system. While some systems are more suited for internal decision making, others are made for external financial reporting.
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there are two renowned costing system i.e., job order costing system or process costing system used by manufacturing or service organization. you are required to highlight the suitability, advantages and disadvantages of each costing system in context of organizations working in pakistan.
Given:
there are two renowned costing system i.e., job order costing system or process costing system used by manufacturing or service organization. you are required to highlight the suitability, advantages and disadvantages of each costing system in context of organizations working in pakistan.
Explanation:
Costing is an accounting technique used to determine the exact expenses for materials, labor and overhead incurred in operations. Job order costing records the actual materials and labor expenses for specific jobs, and assigns overhead to jobs at a pre-determined rate. Process costing applies costs to departments based on the average number of units produced per day. Job order and process costing have unique advantages and disadvantages that make them best suited for specific situations.
Job Order Costing- For companies that manufacture many types of products, or make products in batches, job order costing is the most likely accounting system to use. Under job order costing, small-business owners trace materials and labor costs directly to products. That is, the company records how many hours of labor and how many units of materials are used to make the product, multiplies these figures by the cost per unit and tracks the cost by job. Overhead costs, those costs that cannot be easily traced to individual products, are then allocated to products.
Process costing is used by companies that continuously produce a few homogenous products. For example, an orange juice manufacturer, a gravel mine and a maple syrup bottler would all be likely to use process costing. Under a process costing system, costs are aggregated within departments, with each department being treated like a job in a job order costing system. For example, an orange juice company may have juicing, bottling and labeling departments. In a process costing system, the materials and labor costs of juicing would be aggregated in the juicing department accounts. This would be combined with allocated overhead costs related to juicing before transferring the entire balance to the bottling department accounts. Here, the costs already incurred would be added to labor, materials and allocated overheads from the bottling department. This process continues until the product is finished.
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