Question

The computer workstation furniture manufacturing that Santana Rey started for Business Solutions is progressing well. Santana uses a job order costing system to account for the production costs of this product line. Santana is wondering whether process costing might be a better method for her to keep track of and monitor her production costs.

Required

1. What are the features that distinguish job order costing from process costing?
2. Should Santana continue to use job order costing or switch to process costing for her workstation furniture manufacturing? Explain.

Short answer

1. Process costing is utilized for standardized items, whereas the job order costing approach is used for one-of-a-kind and customized products.
2. Santana needs to adopt process costing.

Step-by-step solution

Meaning of Job Order Costing

Job order costing is a way of estimating the cost for clients' small, customizable orders. When using the job order costing approach, a job cost record is established to keep track of the relevant expenses incurred during the accomplishment of a given task.

(1) Features that distinguish job order costing from process costing

The features that distinguish work order costing apart from process costing are:

1. The process costing approach mass produces uniform final goods. In contrast, the job order costing method is used for individual work orders created in small quantities.
2. The job order costing system is related to allocating product costs to a specific job. In contrast, process costing is allocating product costs to a specific process.
3. Job order costing is used when a small number of finished goods are produced. In contrast, process costing is utilized when the product needs to be processed at several departments before the business entity can sell it.
4. The process costing approach is used for standardized products, whereas the job order costing method is utilized for special and customized goods.

(2) Explain whether Santana continues using a job order costing or switching to process costing

Santana's business of producing computer workstations is doing well and is anticipated to expand shortly, so she should move to process costing for her workstation furniture manufacturer. For the costing of large manufacturing units that need to be processed at different levels to create finished goods from raw materials, the process costing approach is pertinent. Because products are uniform and production can be effectively controlled to reduce loss experienced during production, the computation for average cost per unit is similarly simple to ascertain under process costing. Santana must therefore change its process costing strategy for office furnishings.