Accurately tracking and controlling costs is an integral part of any successful business. When it comes to managing costs, there are two major approaches that businesses can take: job costing and process costing. Job costing is the practice of tracking expenses related to specific jobs or projects, while process costing looks at costs related to the production of goods and services. Both approaches are important in helping businesses increase efficiencies and maximize profits. In this blog post, we will explore the differences between job costing and process costing and what they mean for businesses. We will discuss how each approach can be used to identify cost savings and improved performance. By the end, you will be armed with the knowledge to choose the best approach for your organization.
Job Order Costing vs Process Costing
What is process costing?
Companies use process costing as a technique to allocate production costs to mass-produced goods. To calculate the total amount of direct and indirect costs of their products over a given time period, large manufacturers who produce large quantities of the same product frequently use process costing. Consumer goods, food products, fuel and oil are some industries that employ process costing. There are three primary techniques for process costing that businesses can employ:
Standard cost
The standard cost is the maximum amount a business anticipates spending to produce a good or service. Companies assess their annual profit plan and determine their operating budget using standard costs. This is an integral part of their budget planning.
Weighted average
The value of inventory and the cost of goods sold are calculated using the weighted average process costing method. Companies aggregate all production-related expenses and allocate these expenses to the overall volume of products produced. The units in their inventory and the units they have already sold are then adjusted for the average cost per unit.
First in, first out
By using the first in, first out method of process costing, costs are assigned to products in the order that they are produced by a business. In this process, the first-produced or first-bought goods are sold, used, or discarded. Because of this, businesses presume that the assets linked to the oldest costs are reflected in the cost of goods sold on the income statements.
What is job costing?
Companies use the job costing method to keep track of all of their costs associated with a particular job. Companies add up all of the costs associated with the labor, materials, and overhead necessary to complete a job to determine the job’s cost. The following formula can be used to determine a job’s overall cost:
Direct labor, direct material costs, plus overhead, equal the total job cost.
This procedure is typically used to monitor the costs associated with creating a particular project or product, such as a structure, a piece of technology, or a small batch of related goods. Because it enables managers to pinpoint the precise costs associated with each component of a project or product, job costing is advantageous. Managers may find it simpler to determine which costs they can cut for upcoming projects in order to save money and boost their margins as a result.
Additionally, it can assist managers and accountants in determining whether resources were allocated to a task correctly or whether their team could have used those resources more effectively elsewhere. Additionally, managers can use job costing to monitor costs for a specific good or service over an extended period of time. This can give them the metrics they require to find areas where their costs can be significantly reduced.
Differences between job costing and process costing
While both job costing and process costing are used to estimate costs for a project or a product, there are some significant differences between the two approaches. Here are some ways job costing and process costing differ:
Job size
The use of job costing may be more advantageous for a business that manufactures custom items or small batches of goods. This is due to the fact that job costing enables managers to monitor and evaluate how a company allocates and utilizes its resources for each component of a particular project. To calculate how much they spend on production over a given period of time, a company that produces large batches of the same product is more likely to use process costing.
Customer billing
Job costing can be used by businesses to help them calculate how much to charge customers for custom projects or products. This is due to the fact that job costing tracks the precise costs connected with a particular project. Large manufacturers, however, may opt to use process costing to help them determine the average cost of each unit they produce so they can impose a flat fee on all of their clients.
Record keeping
Job costing necessitates more thorough record keeping because it is more precise and only takes into account one project or product at a time. Because the time and materials used for each individual job can have an impact on the customer’s final invoice, keeping accurate records of expenses is crucial. Process costing uses aggregated costs to calculate an average cost per unit, so it requires less record keeping.
Uniqueness of product
Job costing is typically used by businesses that create unique products or projects, whereas process costing is typically used by businesses that mass-produce standardized products. This is due to the fact that businesses that produce custom products that differ noticeably from one unit to the next must assess the particular costs connected with each product in order to properly create an invoice and keep track of their expenses. For instance, a construction company might use job costing to estimate the costs related to a specific building they constructed.
To determine how much it costs them to produce each unit on average, a business that produces a lot of the same thing may benefit more from using process costing. For instance, a manufacturer of paper towels might be interested in learning how much it costs to make a single roll so they can decide how much to charge for it and what their expected profit margin is.
Examples
To demonstrate how businesses may employ each of these techniques, the following examples of job costing and process costing are provided:
Job costing example
For one of their clients, a construction company has spent the previous three months building a new office. $5,000 is the total cost of all materials used for this project during this time. Additionally, the construction business paid its workers $16,000 in labor costs to construct the office. When the business divides the number of labor hours devoted to this particular job by their total overhead, the result is $7,000.
The business adds the cost of all materials used ($5,000), the cost of billable hours ($16,000), and the project’s applied overhead ($7,000) to determine the overall cost of the job. They determine that $28,000 was the total price for this particular job.
Process costing example
In order to determine how much to charge per unit, a company that makes plastic dolls wants to know what the average cost of producing each doll is. The manufacturer incurs direct costs for resources and materials for a total of $200,000 over the course of a 30-day period. Additionally, they accrue $100,000 in converted labor and overhead costs.
The manufacturer makes 100,000 plastic dolls in the same amount of time, so the cost-per-unit for each doll is $2 for materials and resources and $1 for conversion, or indirect, costs. The manufacturer can determine that each doll costs them $3 to produce using the process costing method. They can estimate that there is a roughly seven-dollar profit margin per doll if they sell each one for $10.
FAQ
What is the difference between job costing and process costing?
Assignment: Examine the differences between job costing and process costing. Job costing involves figuring out how much each job will cost. When using process costing, the cost is initially established by the process before being determined by the quantity of units produced.
What are the examples of job costing?
Costs are accumulated at the level of small units using job costing. For instance, job costing is suitable for determining the cost of creating a specialized machine, designing a piece of software, constructing a structure, or producing a small quantity of goods.
What is a difference between job order costing batch costing and process costing?
When a single product is produced continuously or over an extended period of time, process costing is employed. When many different jobs with various production requirements are worked on during a given period, job-order costing is utilized.
What is the difference between job costing and process costing quizlet?
The costing of more distinctive and adaptable products is done using the job order method. This is usually applied to small production orders. The costing of more standardized products, which are typically produced in large volumes, is done using the process costing method.
What are the similarities and differences between job order costing and process costing?
The costing of more distinctive and adaptable products is done using the job order method. This is usually applied to small production orders. The costing of more standardized products, which are typically produced in large volumes, is done using the process costing method.
