Job order costing and process costing are systems of collecting and allocating costs to units of production. The key difference between job order costing and process costing is that job costing is used when products are manufactured based on customer specific orders whereas process costing is used to allocate costs in standardized manufacturing environments. Accurate cost allocation is vital irrespective of whether the product is tailor-made or standardized since costing affects the pricing decisions.
1. Overview and Key Difference
2. What is Job Order Costing
3. What is Process Costing
4. Side by Side Comparison – Job Order Costing vs Process Costing
What is Job Order Costing?
The job order costing system is used when products are made based on specific customer orders where each unit produced is considered a job. When the products are unique in nature, the cost of producing two different products cannot be compared effectively since the amounts of materials, labor and overheads will vary from one job to another. Each job will be assigned a unique identifier and a ‘job cost sheet’ will be used to record all job-related information.
E.g. ABV is a customized dress manufacturer that makes bridal wear. ABV will charge the cost of the dress plus a 30% profit margin on cost. The job code is HG201. Consider the following costs.
|Direct labor ($10 per hour for 20 hours)||200|
|Indirect labor ($7 per hour for 6 hours)||42|
|Manufacturing overheads (15 per hour for 26 hours)||390|
Job costing helps to identify costs and profit earned for individual jobs. Thus, it is very convenient to identify each job’s contribution to firm’s profit. Based on the cost to serve a particular customer, the company can decide whether it is lucrative to continue business relationships with such customers. However, job costing can also result in information overload since the company has to keep track of all the usage of cost components such as materials and labor. For overall management decisions such as assessing company profitability, these individual job information is of limited use.
What is Process Costing?
In contrast to job costing, process costing is used in standardized production processes where the units manufactured are identical in nature. In a setting of this nature, the costs will be assigned to different departments or workgroups. The cost per unit will be calculated by dividing the total cost for the department or workgroup by the number of units produced.
E.g. DRA Company manufactures plastic bottles, and the production process operates with 3 departments and produced 6,500 bottles for the last month. Consider the following costs for each department.
An advantage of process costing is that it allows businesses to get detailed information on the production from individual departments or workgroups. This method is more appropriate for continuous manufacturing settings, such as factories and utility companies. However, it should be noted that process costing may allow certain non-production expenses incurred by the department such as office expenses to be included in the costing which will ultimately result in higher selling prices.
What is the difference between Job Order Costing and Process Costing?
Job Order Costing vs Process Costing
|Job costing is used when products are manufactured based on customer-specific orders.||Process costing is a cost allocation method that is used to allocate costs in standardized manufacturing environments.|
|Nature of the Units Produced|
|Units produced under job costing is separate from one another and is unique.||Products that use process costing is homogenous in nature.|
|Job costing is used by firms that manufacture customized products.||Production of standardized units uses process costing.|
Summary – Job Order Costing vs Process Costing
Job costing and process costing are two commonly used cost allocation methods. The objectives of the two are largely similar in nature; the difference between job costing and process costing exists depending on the nature of organizations who use them. If the product is unique in nature, job costing provides a suitable platform to calculate the unit cost. If the production process has uniformity, then process costing will assist effective cost allocation and better pricing decisions.
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4. “What Are the Advantages & Disadvantages of Process Costing?” Chron.com. Chron.com, 21 July 2010. Web. 24 Mar. 2017.