Determining the proper costing system Professor Julia Silverman received the fol

ID: 2556461 • Letter: D

Question

Determining the proper costing system Professor Julia Silverman received the following e-mail message. "I don't know if you remember me. I am Tim Wallace. I was in your introductory accounting class a couple of years ago. I recently graduated and have just started my first real job. I remember you talking about job-order and process costing systems. I even looked the subject up in the textbook you wrote. In that book, you say that a process costing system is used when a company produces a single, homogeneous, high-volume, low-cost product. Well, the company I am working for makes T-shirts. All of the shirts are the same. They don't cost much, and we make nearly a million of them every year. The only difference in any of the shirts is the label we sew in them. We make the shirts for about 20 different companies. It seems to me that we should be using a process costing system. Even so, our accounting people are using a job-order costing system. Unfortunately, you didn't tell us what to do when the company we work for is screwed up. I need some advice. Should I tell them they are using the wrong accounting system? I know I am new around here, and I don't want to offend anybody, but if your book is right, the company would be better off if it started using a process costing system. Some of these people around here didn't go to college, and I'm afraid they don't know what they are doing. 1 guess that's why they hired someone with a degree. Am I right about this or what?" book, you en a company produces a sin Required Assume that you are Professor Silverman. Write a return e-mail responding to Mr. Wallace's inquiry.

Explanation / Answer

Date: 3/30/2018

Subject: “Process costing V/s Job order costing”

Dear Mr. Tim Wallace,

First of all I am very happy to receive your main asking for job order costing & process costing system.

Mr. Tim Wallace you are not correct because there is clear difference between job order costing & process costing and costing system adopted by your company is correct. So let me explain both method so that you can understand which method to be used in such conditions.

Job order costing is a costing system which is adopted in case of different job order or for different itentifiable products. As you have wrote in the mail that your company is making different label T-shirts for different 20 companies hence all are different itentifiable jobs for your company. So job order costing system is suitable for your company.

Now let’s see process costing system, this system is adopted when a company is involved in manufacturing lengthy production runs involving products that are indistinguishable from each other. Hence in case of your company this costing system is not suitable because manufacturing of T-shirt does not require much lengthy process and T-shirts are clearly differentiable due to different labels for different orders from the buying companies.

So on the basis of above explanation, it is clear that you are not right about these costing system and your company running costing system is correct.

I hope above explanation about costing systems will clear your doubts and definitely you will understand how & why company adopt specific costing method in different production cases.

If you have any further doubt then feel free to write us.

Thanks & Regards

Julia Silverman

Professor