Question

compare and contrast process costing with job-order costing and discuss the need for equivalent units.

Answer 1

1) The process costing is used where a single homogeneous product is produced and which passes through different processes. For example, pharmaceutical products, sugar, petroleum products, Automobile industries.

2) The job order costing is used when the product is manufactured as per customer specification. Therefore, the each product is identical. For example, Furniture, Printing, Decorative items, etc.

3) The process costing provide the cost of each manufactured unit and Job order costing will provide the cost of each order and adding profit on it, the company can decide the price of the order.

4) Need for equivalent units: When company manufactures the huge quantity of identical products, there will be some goods which are incomplete at the starting of year and completed during the year, i.e. opening work in progress and there are some units which are started and completed during the year and there are also units which are incomplete at the end of the year, i.e. closing WIP. The cost incurred during the year is for completion of units in opening WIP, units introduced and completed in the same year and also for incomplete units of closing WIP. To calculte the cost per unit, we need to first bring them at same level. Therefore, equivalent completed units are calculated for incomplete portion of opening WIP completed during the year and incomplete units in closing WIP.

For example, if the 5,000 opening units were in opening WIP (60% processed) and they were completed during the year. That means only 40% portion is completed during the year. So equivalent units are 5,000*40% = 2,000 units.