Would job order costing or process costing be used by the Smarties Candy Company?

Edward Dee founded Ce De Candy, Inc. in 1949. He emigrated with his family from
England to the United States, where he opened his first factory in Bloomflied, New
Jersey and later relocated the factory to Union, New Jersey in 1967. At Ce De Candy they
manufactured Smarties, which became known as Americas favorite candy. Due to the
vast popularity of Smarties the companys name was changed to Smarties Candy
Company on January 1, 2011 (Our History, n.d.).

Smarties are made using a gunpowder pellet machines leftover from World War I. Dee
repurposed these machines to make the tablet-shaped candies. Dees three
granddaughters, who have been working on improving the efficiency of the
manufacturing process, now run the company (Dietz, 2016). Smarties are made in color
batches that are then mixed together and sorted into rolls and packs (Dietz, 2016).

The costs associated with running Smarties Company can be classified as direct
materials, direct labor, manufacturing overhead, and selling and administrative expenses.
Direct materials are the raw materials utilized in the final product. These materials are
considered direct materials because they are essential to the final product, and whose cost
can be easily tracked to the final product (Noreen, Brewer, & Garrison, 2016). Smarties
are manufactured 24 hours a day (Dietz, 2016). According to the Smarties (n.d.) website
the ingredients for this candy are Dextrose, Citric Acid, Calcium Stearate, Natural and
Artificial Flavors, Colors (Red 40 Lake, Yellow 5 Lake, Yellow 6 Lake, Blue 2 Lake). As
these are the ingredients that are necessary to make Smarties, they are considered direct
materials.

Direct Labor is labor costs that can be easily and physically traced back to individual
products. It is sometimes referred to as touch labor, because workers are actually
touching the product as it is being made (Noreen et al., 2016). Direct labor in this case
would be considered the cost of the wages of the workforce who are responsible for
directly producing Smarties candies. Thus, some examples of direct labor would be the
line factory workers and the controllers of the repurposed gunpowder pellet machines.

Manufacturing overhead cost are the expenses incurred during the manufacturing process
that dont fall into the direct material, direct labor, and selling or administrative
categories (Noreen et al., 2016). Some examples of manufacturing overhead that the
Smarties Company would incur are the cost of utilities, upkeep for the factory,
maintenance and repair cost for production machinery and the cost of indirect labor.
Indirect labor costs would be for custodial, warehouse or security employees who work in
the factory but dont actually assemble the product.

Nonmanufacturing costs are divided into selling costs and administrative costs. Selling
costs are all cost that are sustained as a result of securing customer order and getting the
finish product to the customer (Noreen et al., 2016). The selling costs that Smarties
Company would incur would be advertising, shipping, sales travel, sales commissions,
sales salaries, and cost of finished goods warehouses (Noreen et al., 2016). On the other
hand, administrative cost are all cost generated by the general management of a company,
rather than from the manufacturing or selling of a product or service. Some examples of
administrative cost for Smarties Company would be the accounting team salaries,
secretary salaries, public relations, cost of office supplies, and cost of maintenance
supplies to name a few (Noreen et al., 2016).

Assuming that only Smarties candies are made in the New Jersey plant, I believe that
Smarties Candy Company is more likely to use process costing rather than job order
costing. Averkamp (n.d.) writes, Process costing is a term used in cost accounting to
describe one method for collecting and assigning manufacturing costs to the units
produced. Processing cost is used when nearly identical units are mass-produced. (Job
costing or job order costing is a method used when the units manufactured vary
significantly from one another.). Under process costing costs are accrued over a fixed
period of time, and then allocated to the units produced during that period of time. It is
also important to note that process costing uses many of the same journal entries used
when using job order costing, therefore making it easy to switch between the two systems
and even adopting a hybrid approach if necessary (Process Costing, 2016).

On the other hand, if the New Jersey plant begins to produce Smarties n crme in
addition to Smarties candy rolls, I believe that the company would switch to using job
order costing. Smarties Company could also utilize a hybrid of the two systems.
Companies employ job order costing when the products being manufactured are
sufficiently different from each other. This is necessary as manufacturing costs in job
order costing are assigned to individual product or batches or products (Averkamp, n.d.).
Smarties n crme differ from their counterparts in size and ingredients. Smarties n
crme are the size of a quarter, while Smarties are much smaller, as well as having the
added non dairy cream flavoring (Dietz, 2016). Thus, it would be more effective for
Smarties Company to use job order costing for allocating costs of the two different
products.

References:

Averkamp, H. (n.d.). What is job order costing? | AccountingCoach. Retrieved October

09, 2016, from http://www.accountingcoach.com/blog/what-is-job-order-costing

Averkamp, H. (n.d.). What is process costing? | AccountingCoach. Retrieved October 09,

2016, from http://www.accountingcoach.com/blog/what-is-process-costing

Dietz, W. (2015, October 15). Would job order costing or process costing be used by the
Smarties Candy Company? Retrieved October 08, 2016, from
https://accountingintheheadlines.com/2015/10/15/would-job-order-costing-or-
process-costing-be-used-by-the-smarties-candy-company/

Noreen, E. W., Brewer, P. C., & Garrison, R. H. (2016). Managerial accounting for
managers (4th ed.). Boston: McGraw-Hill Irwin.
Our History. (n.d.). Retrieved October 08, 2016, from
http://www.smarties.com/history/

Process Costing - AccountingTools. (2016). Retrieved October 09, 2016, from

http://www.accountingtools.com/overview-process-costing

Smarties. (n.d.). Retrieved October 08, 2016, from

http://www.smarties.com/product/smarties/