What is Job Order Costing?
Job Costing, as the name implies, allows companies to track the revenues and costs of each job. Job costing systems record revenues and costs for unique units of product that can be easily distinguished from other units of the product.
This allows managers to assess the accuracy of cost estimates [for pricing and budgeting purposes], determine profitability, and track costs throughout the project may identify unexpected changes early on.
What is Process Costing?
Process costing allows companies to track the costs associated with a specific process or Activity. Process costing systems record revenues and costs for batches of identical units of product.
Comparison of Job Costing with Process Costing
A process costing system is used by companies that produce similar or identical units of product in batches employing a consistent process.
A job costing system is used by companies that produce unique products or jobs.
Process costing systems track costs by processing department, whereas job costing systems track costs by job.
A process costing system is used by companies that produce similar or identical units of product in batches employing a consistent process.
A job costing system is used by companies that produce unique products or jobs.
System Documentation
Accounts Used to Track Product Costing
The three inventory accounts that accountants use to track product cost information—raw materials inventory, work-in-process inventory, and finished goods inventory.
These three inventory accounts are used to record product cost information for both process costing and job costing systems.
However, several work-in-process inventory accounts are typically used in a process costing system to track the flow of product costs through each production department. Thus each department has its own work-in-process inventory account.
[For the purposes of this material, assume each department represents a production process. This explains the term process costing because we are tracking costs by process.]
The sum of all work-in-process inventory accounts represents total work in process for the company.
Recall the three components of product costs—direct materials, direct labor, and manufacturing overhead.
Assigning these product costs to individual products remains an important goal for process costing, just as with job costing. However, instead of assigning product costs to individual jobs [shown on a job cost sheet], process costing assigns these costs to departments [shown on a departmental production cost report].
Related Topics
- Job Costing vs Process Costing
- Assign Direct Material and Direct Labor to Job
- Assign Manufacturing Overhead Costs to Job
- Assign Overhead Costs to Products
- Plantwide Cost Allocation
- Department Cost Allocation
- Activity-Based Costing
- Weighted-Average Cost of Products
- Production Cost Report
- Fixed, Variable, and Mixed Cost Estimations
- Contribution Margin Income Statement
- Cost-Volume-Profit Analysis
- Margin of Safety
- Contribution Margin per Unit of Constraint
- Absorption Costing vs Variable Costing
- Differential Analysis and Decisions
- Cost Decisions for Joint Products
- Capital Budgeting
- Life Cycle Costing
- The Master Budget
- Activity-Based Budgeting
- Standard Costs
- Imputed Value
- Variance Analysis for Product Costs
- Absorption Pricing
- Price Variance
- Absorption Variance
- Responsibility Centers
- Comparing Segmented Income
- Using ROI to Evaluate Performance
- Using Residual Income to Evaluate Performance
- Use Economic Value Added to Evaluate Performance
- Transfer Pricing
In other words, the former is used to calculate the cost of jobs or contracts which are distinct in nature, while the latter used to compute the cost charged to each process. So, here in this article excerpt, we present all the differences between Job Costing and Process Costing, in a tabular form.
Content: Job Costing Vs Process Costing
- Comparison Chart
- Definition
- Key Differences
- Conclusion
Comparison Chart
Meaning | Job costing refers to calculating the cost of a special contract, work order where work is performed as per client's or customer's instructions. | A costing method, in which the costs which are charged to various processes and operations is ascertained, is known as Process Costing. |
Nature | Customized production | Standardized production |
Assignment of cost | Calculating cost of each job. | First of all, cost is determined for the process, thereafter spread over the produced units. |
Cost Center | Job | Process |
Scope of cost reduction | Less | High |
Transfer of Cost | No transfer | Cost is transferred from one process to another |
Identity | Each job is different from another. | Products are manufactured consecutively and so they lose their identity. |
Cost Ascertainment | Completion of the job. | End of the cost period. |
Industry type | Job costing is suitable for the industries which manufactures products as per customer's order | Process costing is perfect for the industry where mass production is done. |
Losses | Losses are usually not segregated. | Normal losses are carefully ascertained and abnormal losses are bifurcated. |
Work-in-progress [WIP] | WIP may or may not exist at the beginning or at the end of the financial year. | WIP will always be present in the beginning or at the end of the accounting period. |
Definition of Job Costing
A method of costing in which cost of each ‘job’ is determined is known as Job Costing. Here job refers to a specific work or assignment or a contract where the work is performed according to the customer’s instructions and requirements. The output of each job consists of normally one or less of units. In this method, each job is considered as a distinct entity, for which cost is ascertained. Job Costing is applied when:
- The execution of the jobs is on the basis of client’s specification.
- All the jobs heterogeneous in many respects and each job require separate treatment.
- There is a difference in WIP [Work in progress], of each period.
Job Costing is best suited for the industries where specialized products are manufactured as per customer needs and demands. Some examples of those industries are Furniture, Ship Building, Printing Press, Interior Decoration, etc.
Definition of Process Costing
A costing technique, which is used to calculate the cost of each process is known as Process Costing. Here process refers to a separate stage where production is performed to convert the raw material into an another identifiable form. Process Costing is used in the industry where identical products are produced in huge quantities.
In Process costing, the plant is divided into some processes where the production is performed either sequentially, parallelly or selectively. The output of the former process becomes the input of the latter process, and at the end, the output of the last process is the final product. The individual process account is prepared for each process.
Process Costing is best suited for large-scale production is done as well as where there are multiple levels of producing a product. Some example of such industries is steel, soap, paper, cold drink, paints, etc.
The following are the major differences between job costing and process costing:
- The costing method which is used for the ascertainment of the cost of each job is known as Job Costing. Conversely, by process costing, we mean the costing technique used to determine the cost of each process.
- Job Costing is performed where the products produced of a specialized nature, whereas Process Costing is used where standardized products are produced.
- In Job Costing, the cost is calculated for each job, but in Process Costing first of all the cost of each process is calculated which is then dispersed over the number of units produced.
- In job costing the cost center is the job itself while the process is the cost center in case of process costing.
- In job costing each job requires special treatment. On the other hand, no such special treatment is required for each process in process costing.
- There is no transfer of cost in job costing, from one job to another. However, the cost of the last process is transferred to the next process in the process costing.
- The possibility of cost reduction is very less in Job Costing. In contrast to Process Costing, the scope of cost reduction is comparatively high.
- In Job Costing, the cost is ascertained after the completion of the job, but in Process Costing, the cost of each job is determined.
- In job costing, losses are not bifurcated. On the contrary, in process costing normal losses are ascertained carefully, while the abnormal losses are bifurcated.
- In job costing, WIP may or may or may not be present at the end of the financial year. As against this, WIP will always be present, irrespective of the quantity, in the beginning, or at the end of the accounting period, in process costing.
Conclusion
There is no comparison between Job Costing and Process Costing because both the methods are used in different industries. Although, the differences exist in the two methods. One such difference is, each job requires a high degree of supervision and control, but the process does not require so, as they are standardized in nature.