Job Costing vs Process Costing Top 13 Differences with Infographics

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Cost Accounting Methods:

They also need to know the costs to determine when a new product should be added or an old product removed from production. Selecting the right costing method is critical, yet most manufacturers struggle with comparing job order and process costing. Both methods follow the same convention of charging direct material, direct labour and factory overhead to production accounts (common pool). You have just been hired as an accountant at a local manufacturing company. They are a small start-up and are unsure how to enter costs into their accounting system.

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Although the methods are different, the main difference can be that job costing requires a higher degree of supervision, but process costing does not need so. Process costing is used when products are manufactured through a continuous or repetitive production process. Process costing results in large quantities of identical or similar units. On a monthly basis, if you use job costing review each completed job and compare the budgeted cost to your actual cost. If you use process costing review your cost by batch instead of individual job.

• Process costing is used when products are manufactured through a continuous production process, resulting in large quantities of identical units.
• For example, an order comes in to make a planner in a certain color for a large employer to give to all employees.
• The batches are a little different, and the manufacturer makes slight adjustments to switch between products.
• Job order costing provides customizable cost control for low-volume complexity.
• Understanding which costing system best fits your operations can influence your financial analysis and pricing strategies.
• In the case of a not-for-profit company, the same process could be used to determine the average costs incurred by a department that performs interviews.

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When the goods are produced only against special orders, job costing is used by firms. On the other hand, when a product passes through several processes or stages, the output of one process becomes the input of next process, and to determine the cost of each process, process costing method is applied. It is generally used when like units are to be manufactured, that too in a continuous flow. While Job Order Costing and Process Costing have distinct attributes, they also share some similarities.

The difference between job costing and process costing

• As job and process costing is used in different industries, there cannot be any comparison between them.
• Both process costing and job order costing maintain the costs of direct material, direct labor, and manufacturing overhead.
• Each unit produced in that process receives an equal share of total costs, meaning that if 100,000 bottles of soda are produced, the cost of raw materials, labor, and overhead for that batch is averaged across each bottle.
• While still in production, the work in process units are moved from one department to the next until they are completed, so the work in process inventory includes all of the units in the shaping and packaging departments.
• Process Costing is used in the industry where identical products are produced in huge quantities.
• This follows the expense recognition principle because the cost of the product is expensed when revenue from the sale is recognized.

Job order costing values inventory uniquely, standard costing uses averages. Job costing supports effective decision-making when product mix changes frequently or units vary significantly. If products are standardized and volume is high, process costing may be preferred for simplicity.

Activity-based costing (ABC) assigns overhead and indirect costs to specific activities rather than products. Process costing simplifies costing for high volume, continuous production runs. It is an apt example of the process costing system for standardized manufacturing. Job order costing provides an accurate assessment of costs and profits across different jobs. It is one of the main job order costing examples used in specialized or custom manufacturing. A method that calculates the cost of every ‘project; is termed Process Costing.

Often, process costing makes sense if the individual costs or values of each unit are not significant. For example, it would not be cost effective for a restaurant to make each cup of iced tea separately or to track the direct material job order costing vs process costing and direct labor used to make each eight-ounce glass of iced tea served to a customer. In this scenario, job order costing is a less efficient accounting method because it costs more to track the costs per eight ounces of iced tea than the cost of a batch of tea. Overall, when it is difficult or not economically feasible to track the costs of a product individually, process costing is typically the best cost system to use.

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While it seems simple to think of the sales price as the purchase price plus a markup, determining the markup costs needs to be an accurate process in order to ensure the sale price is higher than the product cost. To properly capture the information necessary for decision-making, there are different costing systems that track costs in order to determine sales prices, and to measure profits and manufacturing efficiency. The logic is that a business incurs costs based on activities like the number of labor hours worked, the total units produced, or the total miles driven. Process costing and job order costing are both acceptable methods for tracking costs and production levels. Some companies use a single method, while some companies use both, which creates a hybrid costing system.

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Direct costs, such as direct materials and direct labor, are directly traceable to the job, while indirect costs are allocated based on predetermined allocation methods. This method allows for accurate cost tracking and analysis for each job, enabling businesses to determine the profitability of individual orders. Conversely, if you operate in a custom service industry or manufacture unique, client-specific products, job order costing may provide the detailed costing data needed for accurate pricing and profit management. Conclusion In conclusion, job order costing and process costing serve unique purposes tailored to different business models. While job order costing enables precise tracking for custom products or projects, process costing simplifies cost allocation across large volumes of identical items. Understanding which costing system best fits your operations can influence your financial analysis and pricing strategies.

Job order systems are custom orders because the cost of the direct material and direct labor are traced directly to the job being produced. If a company has hybrid production processes that involve both customized jobs and repetitive processes, it may employ job order costing for customized jobs and process costing for standardized or mass-produced items. Both process costing and job order costing maintain the costs of direct material, direct labor, and manufacturing overhead. The process of production does not change because of the costing method.