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Lecture 12

ADMS 1000 Lecture Notes - Lecture 12: Paper Towel, Laundry Detergent, Corn FlakesPremium


Department
Administrative Studies
Course Code
ADMS 1000
Professor
Keith Lehrer
Lecture
12

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ADMS 1000 Lecture 12 Notes Costing the quicker-picker-upper, Comparison of job-order
and process costing and Process cost flows
Introduction
If you have ever spilled milk, there is a good chance that you used Bounty paper towels
to clean up the mess.
Procter & Gamble (P&G) manufactures Bounty in two main processing departments
Paper Making and Paper Converting.
In the Paper Making Department, wood pulp is converted into paper and then spooled
into 2,000-pound (900-kg) rolls.
In the Paper Converting Department, two of the rolls of paper are simultaneously
unwound into a machine that creates a two-ply paper towel that is decorated,
perforated, and embossed to create texture.
The large sheets of paper towels that emerge from this process are wrapped around a
cylindrical cardboard core measuring eight feet (2.5 m) in length.
Once enough sheets wrap around the core, the eight-foot roll is cut into individual rolls
of Bounty that are sent down a conveyor to be wrapped, packed, and shipped.
In this type of manufacturing environment, costs cannot be readily traced to individual
rolls of Bounty
However, given the homogeneous nature of the product, the total costs incurred in the
Paper Making Department can be spread uniformly across its output of 2,000-pound
rolls of paper.
Similarly, the total costs incurred in the Paper Converting Department (including the
cost of the 2,000-pound rolls that are transferred in from the Paper Making
Department) can be spread uniformly across the number of cases of Bounty produced.
P&G uses a similar costing approach for many of its products, such as Tide laundry
detergent, Crest toothpaste, and Pringles chips.
There are two basic costing systems in use
o Job-order costing and process costing.

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A job-order costing system is used in situations where many different jobs or products
are worked on each period.
Examples of industries that typically use job-order costing are furniture manufacturers;
special order printers; shipbuilders; and many types of service organizations, such as
repair shops and professional accounting services.
By contrast, process costing is most commonly used in industries that produce
essentially homogeneous (i.e., uniform) products on a continuous basis, such as bricks,
corn flakes, pop, and paper.
Process costing is particularly used in companies that convert basic raw materials into
homogeneous products, such as Alcan (aluminum ingots), Kimberly-Clark (toilet paper),
Dover Industries (flour), Imperial Oil (gasoline and lubricating oils), and Christie
(crackers).
A form of process costing may also be used by utilities that produce gas, water, and
electricity.
As suggested by the length of this list, process costing is in very wide use.
Comparison of job-order and process costing
Much of what you about costing and cost a flow applies equally well to process costing
in this chapter.
We are not throwing out all that you have learned about costing and starting from
scratch with a whole new system.
The similarities that exist between job-order and process costing can be summarized as
follows:
o Both systems have the same basic purposesto assign materials, labour, and
overhead costs to products and to provide a mechanism for computing unit
costs.
o Both systems use the same basic manufacturing accounts, including
Manufacturing Overhead, Raw Materials, Work in Process, and Finished Goods.
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