Question

Accumulating the costs involved in the production process is the goal of:

a) Job order costing
b) Process costing
c) Both job order costing and process costing
d) None of the above

Answer 1

Both job order costing and process costing are methods used to accumulate production costs, with the former suited to custom products and the latter to homogeneous items in continuous production. They both serve in determining the cost of production, which is essential for assessing profitability.

Step-by-step explanation:

The objective of both job order costing and process costing systems is to accumulate the costs involved in the production process. While job order costing is used for custom or unique items, where each job has distinct production requirements, process costing is applied in situations where the products are more homogeneous and produced in a continuous manner. Nevertheless, both methods aim to determine the cost of production which can be complex, involving decisions such as whether to include fixed asset costs or how to calculate costs in a controlled price environment. Average total cost is crucial in understanding profitability, calculated by dividing the total cost by the total output at varying levels of production, with the relationship typically depicted as a U-shaped curve on a graph.