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CHAPTER PREVIEW 

As the Feature Story describes, the cost accounting system used by companies such as Jones Soda is process cost accounting. In contrast to job order cost accounting, which focuses on the individual job, process cost accounting focuses on the processes involved in mass‐producing products that are identical or very similar in nature. The primary objective of this chapter is to explain and illustrate process costing.

A chart lists learning objectives and do it practices in this chapter. Learning objective 1: discuss the uses of a process cost system and how it compares to a job order system covers uses of process cost systems, process costing for service companies, and comparing job order and process cost systems. Do it practice 1: compare job order and process cost systems. Learning objective 2: explain the flow of costs in a process cost system and the journal entries to assign manufacturing costs covers process cost flow and assigning manufacturing costs. Do it practice 2: manufacturing costs in process costing. Learning objective 3: compute equivalent units covers weighted-average method and refinements on the method. Do it practice 3: equivalent units. Learning objective 4: complete the four steps to prepare a production cost report covers physical unit flow, equivalent units of production, unit production costs, cost reconciliation schedule, and production cost report. Do it practice 4: cost reconciliation schedule. Go to the review and practice section at the end of the chapter for a targeted summary and exercises with solutions. Visit WileyPlus for additional tutorials and practice opportunities.

The Little Guy Who Could

It isn't easy for a small company to get a foothold in the bottled beverage business. The giants, The Coca‐Cola Company and PepsiCo Inc., vigilantly defend their turf, constantly watching for new trends and opportunities. It is nearly impossible to get shelf space in stores, and consumer tastes can change faster than a bottle of soda can lose its fizz. But Jones Soda Co., headquartered in Seattle, has overcome these and other obstacles to make a name for itself. Its corporate motto is, “Run with the little guy … create some change.”

The company started as a Canadian distributor of other companies' beverages. Soon, it decided to make its own products under the corporate name Urban Juice and Soda Company. Eventually, its name changed to Jones Soda—the name of its most popular product. From the very start, Jones Soda was different. It sold soda from machines placed in tattoo parlors and piercing shops, and it sponsored a punk rock band as well as surfers and snowboarders. At one time, the company's product was the official drink at the Seattle Seahawks' stadium and was served on Alaskan Airlines.

Today, Jones Soda makes a wide variety of products: soda‐flavored candy, energy drinks, and product‐promoting gear that includes t‐shirts, sweatshirts, caps, shorts, and calendars. Its most profitable product is still its multi‐flavored, pure cane soda with its creative labeling. If you've seen Jones Soda on a store shelf, then you know that it appears to have an infinite variety of labels. The bottle labels are actually created by customers and submitted on the company's website. (To see some of the best labels from the past, see the Gallery at www.jonessoda.com.) If you would like some soda with a custom label of your own, you can design and submit a label and order a 12‐pack.

Because Jones Soda has a dizzying array of product variations, keeping track of costs is of vital importance. Recently, management developed a reorganization plan that involved cost‐cutting from top to bottom and eliminating unprofitable products. No matter how good your products are, if you don't keep your costs under control, you are likely to fail. Jones Soda's managers need accurate cost information regarding each primary product and each variation to ensure profitability. So while its marketing approach differs dramatically from the giants, Jones Soda needs the same kind of cost information as the big guys.

LEARNING OBJECTIVE 1

Discuss the uses of a process cost system and how it compares to a job order system.

USES OF PROCESS COST SYSTEMS

Companies use process cost systems to apply costs to similar products that are mass‐produced in a continuous fashion. Jones Soda Co. uses a process cost system: Production of the soda, once it begins, continues until the soda emerges. The processing is the same for the entire run—with precisely the same amount of materials, labor, and overhead. Each finished bottle of soda is indistinguishable from another.

A company such as USX uses process costing in the manufacturing of steel. Kellogg and General Mills use process costing for cereal production; ExxonMobil uses process costing for its oil refining. Sherwin Williams uses process costing for its paint products. At a bottling company like Jones Soda, the manufacturing process begins with the blending of ingredients. Next, automated machinery moves the bottles into position and fills them. The production process then caps, packages, and forwards the bottles to the finished goods warehouse. Illustration 16-1 shows this process.

An illustration shows manufacturing processes as ‘blending’, to ‘filling’, to ‘labeling’. ILLUSTRATION 16-1 Manufacturing processes

For Jones Soda, as well as the other companies just mentioned, once production begins, it continues until the finished product emerges. Each unit of finished product is like every other unit.

In comparison, a job order cost system assigns costs to a specific job. Examples are the construction of a customized home, the making of a movie, or the manufacturing of a specialized machine. Illustration 16-2 provides examples of companies that primarily use either a process cost system or a job order cost system.

Image described by surrounding text ILLUSTRATION 16-2 Process cost and job order cost companies and products

PROCESS COSTING FOR SERVICE COMPANIES

When considering service companies, you might initially think of specific, nonroutine tasks, such as rebuilding an automobile engine, consulting on a business acquisition, or defending a major lawsuit. However, many service companies perform repetitive, routine work. For example, Jiffy Luberegularly performs oil changes. H&R Block focuses on the routine aspects of basic tax practice. Service companies that perform individualized, nonroutine services will probably benefit from using a job order cost system. Those that perform routine, repetitive services will probably be better off with a process cost system.

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