Proccess Costing vs Job Order
The Hershey Company/ Kaiser Aluminum Process costing is used mostly in companies when converting raw materials into homogenous products. A single product is produced on a continuous basis and all units of the product are identical. Costs are computed by department where the materials, labor, or overhead costs are added to the product in the processing department. Our two companies, The Hershey Company and Kaiser Aluminum, convert raw materials to their finished products of chocolate and aluminum.
The Hershey Company’s main raw materials come from cocoa products such as cocoa liquor, cocoa butter and cocoa powder that is processed from cocoa beans. They continuously make certain chocolate products under their brand name or franchise. Under their annual report it states that their cost of sales represents the costs directly related to the manufacture and distribution of their products. These costs are the raw materials, packaging, direct labor, overhead, shipping and handling, and warehousing and distribution facilities. Their manufacturing overhead includes salaries, wages, utilities, maintenance and property taxes.
This shows why The Hershey Company would use process costing because their costs are traced to only a few departments and there aren’t significant differences among the costs of various products. They are continuously making large batches of chocolate products and use an assembly line of mixing, refining, molding and wrapping to do it. Kaiser Aluminum has separate facilities for specific markets and processes. They use raw materials of alloy to create aluminum. Kaiser focuses on specific products of aluminum ranging from different sizes, shapes and quality. But they are constantly making aluminum.
Both of these manufactures would use process costing because they are continuously making large quantities of the same identical product for each period. The costs are allocated to the units of the product in order to create an average cost for each unit. Job Order Costing – Debevoise & Plimpton/ Delta Marine Job-order costing is used in situations where many heterogeneous products are produced each period. Debevoise and Plimpton is a law firm that uses job order costing to manage their individual client accounts. Debevoise and Plimpton provides a wide array of legal services related to litigation, real estate, M &A, tax and many more.
Delta Marine is a custom yacht building company that also uses job order costing due to the uniqueness and varying costs of each order. For example the website details plans on building a 70 foot yacht mainly to be used for those who enjoy fishing and diving. It also details a 66 meter yacht with a focus on the interior for those who are interested in worldwide cruising. The costs of these two products would vary greatly. In the case of Debevoise and Plimpton, each client they represent may be considered a “job. ” The true cost of each job would be difficult to measure.
Direct Materials such as legal forms, shipping costs, etc and Direct Labor such as attorney wages may be easier to match to the specific job, but overhead such as the cost of secretaries, depreciation, mailroom clerks, etc would be very difficult to link to a specific client. Examples of Overhead for Delta Marine that would be hard to link would be incoming inspection costs, dock rental space, website maintenance and advertising costs. While some overhead may be fixed from month to month such as factory rental and lease costs, the number of jobs produced for each of these companies could vary dramatically from month to month.
These expenditures will need to be factored into the cost of each job using a predetermined overhead rate. Total overhead costs would need to be estimated in advance and divided by the allocation base (both companies would most likely use estimated direct labor hours for their allocation base). Estimating these overhead costs in advance establishes a unit cost which helps these companies compute the cost of goods sold on their income statement and set rates that would lead to future profit.