Question

4 Which types of companies would most likely use a process costing system and which types of companies would use job costing? Provide examples of two Saudi Companies.

Explain the methods with which the cost per unit will be calculated for each type of company using numerical example.

please company must be in Saudi Arabia

Answer 1

Process Costing System: Process costing is a method of costing used in industries where the raw material has to pass through two or more processes for being converted into a final product. It is a method of Cost Accounting whereby costs are charged to processes and averaged over units produced. A seperate account for each process is opened and all expenditure pertaining to a process is cahrged to that process account. This type of costing system useful in the manufacturing of products like paper, steel, medicines, chemicals, soaps etc. where the production process is continuous and the output of one process becomes the input of the next process till completion.

Two examples of Saudi Arabia companies adopting Process costing are Delmon Chemical Industries and Johnson Saudi Co. LTD

Example: Opening Work-in-progress 1,000 units (60% complete); cost $ 1,10,000. Units introduced during the period 10,000 units; cost $ 19,30,000. Transfered to next process - 9,000 units.

Closing work-in-progress -800 units (75% complete). Normal loss is estimated at 10% of total input including units in process at the beginning. Scarps realise $10 per unit. Scarps are 100% Complete.

Using FIFO method, compute equivalent production and cost per equivalent unit.

Answer:

Statement of Equivalent Production Units (under FIFO method)
Particulars	Input units	Particulars	Output unit	Equivalent production
%	Equiavlent units
Opening W-I-P	1,000	From Opening W-I-P	1,000	40	400
Units introduced	10,000	From fresh inputs	8,000	100	8,000
		Units Completed ( Transfer to next process)	9,000
		Normal Loss	1,100
		{10% (1,000+10,000units)}
		Closing W-I-P	800	75	600
		Abnormal Loss	100	100	100
		(Balancing figure)
	11,000		11,000		9,100

Cost per equivalent production unit
Particulars	Amount (in $)
Cost of the process	19,30,000
Less: Scarp value of normal loss ($10 * 1,100 units)	(11,000)
Total Process cost	19,19,000
Total Equivalent Units	9100 Units
Cost per equivalent unit (19,19,000/9,100)	$ 210.88

Job Costing: According to this method, costs are collected and accumulated according to jobs, contracts, products or work orders. Each job is treated as separate entity for the purpose of costing. Job costing is carried out for the purpose of ascertaining cost of each job and takes into account the cost of materials, employees and overhead etc. The job costing method is also applicable to indutries in which production is carried out in batches. This method of costing used in the industries such as printing, furniture, hardware, heavy machinery etc.

Example: A company enters into a job contract with its customers for the manufacture of prodcuts. The following costs are incurred for the job:

Direct Materials - 2000 Kgs @ $10/- per kg, Direct Labour - 150 labour hours @ 25/- per labour hour and other overhead cost incurred - $ 28,000/-.

Answer:

The Job Cost = Direct material cost + Direct labour cost+ Overhaed cost

= 2000*10+ 150*25+28000

= $ 51,750/-