Job order costing

Hello everyone. I would like to welcome you to this HS Talks Lecture Series on managerial accounting. My name is Alexander Himme, and I'm Assistant Professor for Managerial Accounting at the Kuhne Logistics University in Hamburg, Germany. In this module, we dig deeper into how product costs are tracked. The first possibility to accumulate costs is a job order costing system. We'll talk about the cost flows associated with job order costing and how overhead costs are allocated to products and services.

There are two types of cost accounting systems; job order costing and process costing. Companies can be divided into two major types depending on whether their products or services are unique. Job order costing is used by businesses that produce unique products or provide specialized services. Here, costs are accumulated for each batch or job. Examples of these types of companies that use job order costing are; accounting firms, building contractors, shipyards and customized furniture manufacturers. In contrast, process costing is used by businesses that manufacture large quantities of identical units. Production is carried out through a series of steps or processes, and costs are accumulated for each process. Examples of the types of companies that use process costing are for example, soft drink manufacturers like Coca-Cola, whose processes may include mixing, bottling and packaging, or car manufacturers whose processes may include assembling and painting. Both accounting systems have in common, that they are usually set up out of four steps. In the first step, all production costs are accumulated. That means that all incurred costs are collected and documented. In the second step, they are easily plausible, costs are assigned to costs objects. For example, the unit of a product. As you remember from Module 2, this will be easy for all the so-called direct costs. However, it's more difficult for the indirect costs like manufacturing overheads. For these indirect costs, we have to find ways how to allocate the costs of cost objects. This is done in the third step, the allocation of overheads. Finally, you have to do some adjustments. This is because you will allocate the indirect cost before they actually incur. You do this based on a so-called predetermined overhead rate. In the end, we may have allocated too much or too less overhead costs to the cost objects. Then we have to adjust this, the fourth step of the cost accounting system. Here, in Module 4, we now concentrate how this costing process exactly looks like in a job order costing system. In Module 5, you'll then look at process costing and the different approach that process costing takes.