Job Order Costing vs Process Costing
What is process costing?
Businesses use process costing to monitor production, much like job order costing. Process costing, however, places more of an emphasis on mass-produced goods and overall production department costs than tracking one-of-a-kind products.
Many large businesses employ process costing to take into account variables like the number of finished products they have. A process costing system starts with an inventory analysis and cost calculation. After that, you determine the cost per unit and apply it to both finished and unfinished goods. Depending on its requirements, a company can select from a few different process costing methods.
Process costing can be helpful for any industry that manufactures large quantities of a single or similar product, including those that produce fuel, processed food, pharmaceuticals, paint, and plastic.
What is job order costing?
Costing in accounting refers to figuring out manufacturing costs like overhead, materials, labor, and time. Understanding manufacturing costs can aid businesses in decision-making, such as how much to charge for their goods and what materials to order. The production of small, one-of-a-kind batches of products ordered by customers can be monitored using job order costing. With a job order costing system, you can monitor the cost of each project separately and make sure that your business makes enough money on each order to maintain operations.
You can track costs from financial records and enter them in a job cost sheet or database when using job order costing. When recording costs, the entry for each item tracked includes the materials used, the time it took to make the item, the number of people who worked on the item, and the item’s total manufacturing overhead. Monitoring this data can help you make sure that your business makes money when a product is sold.
For instance, if you work for a retail business and a client orders personalized baseball hats, you could set a price for this one-of-a-kind order using job order costing to make sure you can turn a profit. For service sectors like hospitals, fashion brands, furniture manufacturers, and other businesses that complete specific customer orders, job order costing can be useful.
Job order costing vs. process costing
Understanding job order costing and process costing is beneficial for manufacturers as both can be used to estimate the cost of goods. Both job order costing and process costing, which use roughly the same data to calculate unit cost, can be used by your company to track production costs and allocate expenses, such as time, materials, and labor, to your products.
But there are also some significant distinctions between job order costing and process costing, such as:
Product type
One key distinction between job order costing and process costing is the type of product and the product’s uniqueness that is assessed. Businesses use process costing for mass-produced or standardized products, whereas they use job order costing for small batches of customizable or one-of-a-kind products and individual job orders. In process costing, the produced goods are frequently identical or very similar.
For instance, a retailer producing a customer order of personalized pens might find job order costing useful. Process costing, however, might be more appropriate if the company produced pens in large quantities.
Industry
Frequently, various industry types favor either job order costing or process costing. Job order costing is frequently used by industries, such as retail businesses and hospitals, that produce unique or custom orders for individual customers. Process costing is typically used by industries that produce large quantities of a single product or similar products, such as producers of a single product.
Job size
Another distinction between job order costing and process costing is job size. Smaller orders or jobs usually call for the use of job order costing, whereas larger production jobs usually call for process costing. For instance, a company might use job order costing to estimate a small job such as a customer’s custom furniture order. A company may employ process costing to monitor the costs associated with producing a sizable order of furniture in bulk.
Cost accumulation
Additionally, job order costing and process costing use different methods of cost accumulation. In job order costing, costs accumulate by individual jobs. Job costing typically involves customer billing to specify the precise cost of each step in the process of a given job or order. Process costing does not always focus on the precise cost of each item in the process; instead, costs are accumulated by each process or processing department.
Cost reduction
The opportunity for cost reduction, which refers to actions businesses can take to lower their cost of production and boost profits, is another distinction between the two types of costing. Job costing typically provides fewer opportunities for cost reduction, whereas process costing provides businesses with a variety of cost reduction opportunities.
Work in progress
The costs of incomplete products, including materials and labor, are referred to as “work in progress” (WIP). Businesses typically don’t combine job order costing with work in progress. However, when products move between departments, businesses may record work in progress in process costing.
Record keeping
Businesses maintain job order costing and process costing records in different ways. One inventory account is typically used in job order costing systems for each distinct job. Because companies that use job order costing track materials and other resources for each job item, it typically necessitates more record keeping than process costing. In contrast, each production or process department in a process costing system has a separate inventory account, which aggregates costs.
FAQ
What is the difference between process costing and job order 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.
What is job order costing process costing with example?
A process cost system is typically used for a large volume of similar products, whereas a job order cost system is typically used for a small volume of unique products, which is one of the main differences between the two.
What is one main difference between a process cost system and a job order cost system quizlet?
A process cost system is typically used for a large volume of similar products, whereas a job order cost system is typically used for a small volume of unique products, which is one of the main differences between the two.
