Question

Which of the following statements about the Work in Process account is true?

Both job-order cost and process cost systems use only one Work in Process account.

Both job-order cost and process cost systems use several Work in Process accounts.

Job-order cost systems use several Work in Process accounts, but process cost systems use only one.

Job-order cost systems use only one Work in Process account, but process cost systems use several.

Answer 1

Of the four statements about the Work in Process account, the second statement is true -

Both job-order cost and process cost systems use several Work in Process accounts - True

Explanation :

1. Job-order costing:

• Job order costing system is used where companies offer speciaised goods or service which are customized as per the clients / customers specifications. Thus, each job order is unique.
• For example, a consultancy firm provides customized solutions for each of its clients, its services are unique and thus it would follow job costing.
• In job costing, costs are accumulated by individual jobs or orders. Thus, several Work in Process accounts are prepared; one for each job.

2. Process costing:

• Process costing system is used when a single or similar products are produced in large quantities. Here production is not divdided into jobs or orders but is a continuous process and is divided into various sub-processes.
• For example, production of breakfast cereal is a continuous process, where only one homogenous or same product is produced. The production process can be divided into processes like - preparation of dough, production of cereal, packaging into boxes etc. Thus, such a company can follow process costing.
• In process costing, costs are accumulated by sub-processes or departments. Each process or department has its own Work in Process account. Thus, under process costing also several Work in Process acounts are prepared (one for each process or department).