System Requirements

Job Order System:

As previously indicated, our Production Cost may be controlled with a Process Costing System or with a Job Order System

We may express this Production Cost in actual values of Direct Material, Direct Labor and Departmental Operating Cost. Or we may express the Production Cost in Normal Values or in Standard values.

We absolutely recommend the use of Standard Values to establish the Production Cost. 

The Process Costing System will have to control the production of an accounting period [ month ]. This system will not give the accountant a necessary detailed information to present to Management.  We would need to establish some value of work in process: The amount of raw material still unprocessed in the Direct Production Department, some product half finished, another 3/4 finished, and so on. We remember that this work in process exists just during one night or some week end. When we close one days work, we will have this evening some products in process.  Next morning these products in process will be changed probably within the first hour of work. The total amount of such work in process is probably not the value of one days work. If it would be, than the total production of the month would be some 20 time of more value. Therefore this work in process is a value of little impact.

If we work with Job-Order System, we will control the production by each Job-Order  -  not by the month.  The Job-Order may take 12 days or may be 55 days to complete. We will control this Job-Order referring to how much Direct Material, Direct Labor and Departmental Operating Cost were charged to this work. Independent if it started in one month and ended in another.

Such control is absolutely more efficient - than the Process Costing procedure.

However, we have to recognize that to organize and realize a correct Job-Order System - is not simple. We would require someone to work with the Internal Accounting - and who will structure all the necessary details, so the Job-Order System will give us the correct information.  But once it is done, it will work for many years and give management the very best information about production cost.  

The Standard Cost that a company will establish with this Job- Order System - will naturally also serve as the Cost of Goods Sold.  Our computers have enough memory and are fast enough, to tell management how much Cost of Goods Sold correspond to each sold product. Accountants will not need to prepare for managers some special Variable cost system.  Accounting will be perfectly fine working with Absorption system, with all its necessary detailed information.




Job Order System:

Internal Accounting requires the use of some type of a Job-Order system to control production. If a standard Job-Order system is too detailed for a company, then a simplified version must be designed and implemented (for example one Job-order for several different smaller production activities). 

Job Orders Vs. Process Costing:

When production is controlled by Job-Orders, we focus on Actual costs contra Standard costs and Actual hours contra Standard hours. We do not care if a Job Order started and finished during a given month, or not. We do not care about the snapshot of Unfinished production (WIP) in a Job Order at month-end. We focus instead on the Variance accounts , especially Price Variance of raw material and Efficiency Variances of direct labor. We can track variances down to the individual Job Order.

If production is controlled by Process Costing, this is more indefinite. Process Costing tracks one kind of production during a whole year (or several months). This means we can control production costs only once a year, when we compare actual costs to standard costs. During the rest of the year, we have no monthly cost visibility. Verbal estimates, even from supervisors, will probably be unacceptable.

Only a few industries can use Process Costing to good effect -- those that have only one type of product, like soya bean oil, for example. For Internal Accounting all other industries should use Job-Orders and Standard Costs.