Question

As manufacturing organizations incur costs for Raw Materials and Direct Labor:

1) How will these costs be associated to the product being made for both Job Order Costing and Process Costing?

2) What impact does the way Raw Materials and Direct Labor are associated to the product being made have on the information provided and the decisions being made by the organization?

3) Provide supportive statements for under what circumstances each of these methods (Job Order Costing, Process Costing) would be more appropriate for internal decision making.

Answer 1

1 The direct labour and direct material costs are the direct costs. These costs would be charged to the products as the product incurs or requires them. The direct material costs would be assigned according to the amount of material used by the product. While the direct labour cost would be assigned as we the amount of labour consumed in producing the product. This would be same under both the costing

2. The way the raw materials and direct labour costs are associated with the product directly impacts the decision made by the organisation for the products. Based upon the costs, the organisation decides whether to go ahead with the product or not. If the costs are high as compared to the selling price, the organisation may not want to continue with the product while if the costs are less, the organisation may want to produce the product more and sell more.

3. If the organisation produces similar type of product, then the organisation may want to go ahead with the process costing since all the products are similar and produced with a similar process. While if the company is producing different types of specialised products, it should use job order costing i.e. costing based upon orders.