Question

List two types of costing systems, and list three types of companies that use one or the other of the methods.

Answer 1

A product costing system is a set of procedures used to account for an organization’s product costs and to provide timely and accurate unit cost information for pricing, cost planning and control, inventory valuation, and financial statement preparation. The two basic types of product costing systems are the job order costing system and the process costing system.
Organizations that make custom, unique, or special-order products typically use a job order costing system. Such a system traces the costs of direct materials, direct labor, and overhead to a specific batch of products or a specific job order (i.e., a customer order for a specific number of specially designed, made-to-order products). A job order cost card is the document on which all costs incurred in the production of a particular job order are recorded.
Companies that produce large amounts of similar products or liquid products or that have long, continuous production runs of identical products typically use a process costing system. Makers of paint, soft drinks, candy, bricks, and paper would use such a system. A process costing system first traces the costs of direct materials, direct labor, and overhead to processes, departments, or work cells and then assigns an average cost per unit to the products manufactured by those processes, departments, or work cells.
In reality, few production processes are a perfect match for either a job order costing system or a process costing system. The typical product costing system therefore combines parts of job order costing and process costing to create a hybrid system designed specifically for an organization’s production process.