Costing of products and services is key part of a companys profits and management

decisions. A managers decisions are only as good as his/her understanding of information.

Therefore, it is of utmost importance that managers understand how their products are costed in
order to plan, control, and make decisions that will improve the efficiency of a company as well
as improve the bottom line for stakeholders. I will be discussing absorption costing full costing!
which is "all manufacturing costs, both fi#ed and variable, are assigned to units of product $
units are said to fully absorb manufacturing costs% &arrison, '()', p *+!. Absorption costing is
the most commonly used costing method worldwide, this is because ta# reporting and e#ternal
financial reports which conform to &AA, standards re-uire some form of this costing. As
.ddison .lectronics Companys financial analysis, I believe that the costing of the new )./
gigabyte computer memory chip should utili0e a process costing system over a 1ob2order costing
system and I will provide information and my reasoning as to why this will be the best method
for ..C. 3irst of all there are similarities of both costing systems4 they both have the same
function which is to allocate direct materials, direct labor, and manufacturing overhead costs to
the products that the company manufactures and provide a way to calculate the cost per unit
produced5 both systems use the same manufacturing accounts5 and the movement of costs
through the accounts pretty much similar &arrison '()'!.
There are three differences between process costing and 1ob2order costing. They are4
process costing is when single identical units are being produced for long periods of time, 1ob2
costing is when many different speciali0ed products are being produced during each period5
process costing accrues costs by department whereas 1ob2costing accrues costs by each
individual 1ob5 and lastly in process costing unit costs are calculated by department while 1ob2
order costing unit costs are calculated by 1ob on the 1ob cost sheet 6imilarities '()'!.
6ince a )./ 78 computer memory chip will be massed produced with each one being
identical process costing is the best choice for ..C to report costs. 3or e#ample, we will say that
..Cs memory chip has two processing departments4 manufacturing and the inspection and
packaging department. The flow of costs through a process costing system begins with raw
materials obtained using a materials re-uisition form lists the type and -uantity and cost of the
materials put into production and is utili0ed to make the correct 1ournal entries! being taken to
the manufacturing processing department, labor costs to build the memory chip are also added
here, and overhead costs are applied using a predetermined overhead rate calculated before the
period began, is calculated by taking the total estimated manufacturing overhead costs and
dividing by the total estimated amount of the allocation base, which in ..Cs case of the
memory chip we would use machine hours machine hours is the cost driver because the memory
chips are produced mainly by machines so it drives overhead costs !!. To apply overhead the
predetermined overhead rate would be multiplied by the number of machine hours actually
utili0ed in each processing department. 9o matter how many processing departments a company
has, two main functions happen in each4 each unit passing through receives the same processes,
and all the units are e#actly the same. The flow of costs continues to the inspection and
packaging department adding any material, labor, and overhead costs that are incurred in this
processing department as well. After the memory chips are manufactured, inspected, and
packaged for shipping the costs of the completed units are transferred to 3inished &oods
account. :hen a customer places and order and the order is subse-uently filled, the cost of the
units sold is transferred to Cost of &oods 6old account. &arrison '()'! All of these costs flow
through the process costing system utili0ing T2accounts and the accounting department records
the necessary 1ournal entries that are re-uired throughout a period until the financial statements
are prepared or management re-uests an internal report to analy0e.
In order to compute unit product costs in a department, the output must be determined. If
any processing department contains unfinished units, these must be shown as completed units.
This is accomplished by using the e-uivalent unit formula4 9umber of unfinished units # the
percentage of completion. In order to calculate the cost per e-uivalent unit the weighted2average
method is utili0ed. ;eep in mind that a calculation is made for individual cost categories in each
of the processing departments. The formula to compute the cost per e-uivalent unit is4 cost of the
beginning :I, inventory plus cost added during the period divided by the e-uivalent units of
production. To find the total cost2per2unit add up the unit costs from each processing department.
The <aw 7aterials Inventory, :ork in ,rocess Inventory, and 3inished &oods Inventory
Accounts will transfer to the 8alance 6heet of a specified period. The Cost of &oods 6old
Account will transfer to the Income 6tatement for a specified period. &arrison '()'!
6o based on the fact that the computer memory chip is a uniformly identical and mass
produced product process costing is the best method to utili0e at ..C. Also, any other products
..C would mass produce identically can utili0e the process costing system. 6uch products could
include4 motherboards, power supply, memory, printers, as well as many other electronics
products. 6ome speciali0ed products that ..C may offer that would utili0e the 1ob2order costing
system include4 build your own computer, speciali0ed hardware or software designed for
companies, or any products that we are e-uipped to produce that re-uire speciali0ed or uni-ue
specifications for the customer.
<eferences
&arrison, <. =., 9oreen, .. :., > 8rewer ,. C. '()'!. Managerial Accounting. 9ew ?ork4
7c&raw2=ill/Irwin.
6imilarities 8etween @ob Arder and ,rocess Costing 6ystem. '()'!. Accounting for
7anagement. <etrieved from
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