Question

How do job order and process costing systems, as well as their related valuation methods differ?

Answer 1

Job order and process costing systems

Many businesses produce large quantities of a single product or similar products. Pepsi-Cola makes soft drinks, Exxon Mobil produces oil, and Kellogg Company produces breakfast cereals on a continuous basis over long periods. For these kinds of products, companies do not have separate jobs. Instead, production is an ongoing process.

1. Both job and process cost systems have the same goal: to determine the cost of products.

2. Both job and process cost systems have the same cost flows. Accountants record production in separate accounts for materials inventory, labor, and overhead. Then, they transfer the costs to a Work in Process Inventory account.

3. Both job and process cost systems use predetermined overhead rates to apply overhead.

Accumulates costs incurred to produce a product according to the processes or departments a product goes through on its way to completion. In these types of operations, accountants must accumulate costs for each process or department involved in making the product.

Their related valuation methods differ

Definition

A set of procedures or techniques used to determine the business value.

It has been said in the world of navigation that “before you chart a course for where you’re going, you must first determine where you are.” Such an adage would appear to be true in managing a business, as well. Without knowing vital information such as spending, inventory, or forecasts, we would all be shooting in the dark when it comes to developing a successful business strategy. And a tremendously helpful tool for determining these corporate vitals is a Business Valuation.

Asset Approach

Also known as “The Cost Approach,” the Asset Approach is rooted in the principle of substitution, which states that a prudent investor would pay no more for an existing business than the cost to replace its underlying assets new

Market Approach

As the name implies, the Market Approach considers identical or directly comparable assets (and liabilities) in the marketplace, to derive a value amount for the business.

Income Approach

The Income Approach can take different forms, such as discounted cash flow or capitalization of cash flow methods. The appropriate form depends on the nature of the business and the industry in which it competes, as well as its stage of development. This method requires the estimation of either future cash flows over a discrete time period, or a normalized level of cash flow along with an estimate of a long-term growth rate.