Job Costing vs Process Costing Accounting Explained

You can allocate mileage costs based on the number of miles driven to and from your particular customer’s location for instance. Process costing is used when the products or services you offer are nearly identical or close to it. There is no comparison between Job Costing and Process Costing because both the methods are used in different industries. 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. Job order costing refers to calculations that are made by companies that complete work on a project-based system. This kind of work is done by tradesmen such as plumbers, mechanics, movers, and similar tradespeople. These industries operate under the knowledge that no job is ever the same and each job has its own criteria for success.

Process Costing is used in the industry where identical products are produced in huge quantities. In job order costing the costs are ascertained for each job individually, and as each job is independent of the other no transfer of costs is needed. However, in process costing costs need to be transferred from one process to the other. These general rules for S&A expenses, however, have their exceptions. For example, some items that are classified as overhead, such as plant insurance, are period costs but are classified as overhead and are attached to the items produced as product costs.

Job Costing vs. Process Costing Infographics

Can you imagine having to determine the cost of making just ONE lego when we can make 1.7 million legos per hour? Accountants compute the cost per unit by first accumulating costs for the entire period for each process or department. Second, they divide the accumulated costs by the number of units produced in that process or department.

• Each job will be assigned a unique identifier and a ‘job cost sheet’ will be used to record all job-related information.
• What is the difference between a job casting system and a job?
• Manufacturing overhead includes the cost of gloves used when preparing the meals, the cost of employees who support but are not directly involved in preparing the meals, and the cost to operate the oven.
• 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.
• And at the end of the process, the final output or product is created.

Figure 5.2 shows a partial organizational chart for Rock City Percussion, a drumstick manufacturer. In this example, two groups—administrative and manufacturing—report directly to the chief financial officer . Each group has a vice president responsible for several departments.

Customer Billing

Process costing accumulates costs by process or department. Many businesses produce large quantities of a single product or similar products. Pepsi-Cola makes soft drinks, Exxon https://accounting-services.net/ Mobil produces oil, and Kellogg Company produces breakfast cereals on a continuous basis over long periods. For these kinds of products, companies do not have separate jobs.

Unit costs are recorded by job on a cost sheet that follows the job through the production department. When a batch of shirts is finished, the total cost to move from work in process inventory to finished goods inventory, which indicates the products are ready for sale. At this point, Hannah’s company needs to precisely track the material cost and labor costs that are needed to make a batch of shirts. When an employee pulls a new roll of cotton fabric from the shelf to make the shirts , the cost has to be moved out of material control and into work in process. If a worker incurs 3 hours of time working on batch number 112, the gross wages have to be reclassified from labor control to work-in-process. Consider, for instance, a company that manufactures fabric face masks.

The Size of the Job

Process costing on the other hand is the costing for larger volumes. The costing is done for a huge process and costs are allocated to process rather than individual jobs. It is essential for manufacturers to understand both methods of costing in order to support things they need to know such as production costs, materials and labor costs, or how much to charge for their product. In job costing, the compare and contrast job order and process costing systems cost is calculated after completing the job. However, in process costing, the cost of each job is determined. Raw materials are stored in the materials storeroom and delivered to the appropriate production department—cutting, painting, or assembly/finishing. The design department uses direct labor to create the design specifications, and, when completed, it sends them to the production department.

Job costing and process costing can be used in both manual and computerized accounting environments. The costing system used typically depends on whether the company can most efficiently and economically trace the costs to the job or to the production department or batch . When job order costing, all costs are related to specific jobs and they often differ from one another. These types of jobs usually require some sort of estimate for a customer or client. For example, a mechanic would calculate their estimate by determining labor costs, equipment use, parts needed, and anything else needed to complete the job. Additionally, they would need to calculate their profit margin to ensure their garage is earning enough money to sustain their operations.

Even two sticks made sequentially may have different weights because the wood varies in density. These types of manufacturing are optimal for the process cost system.

There is less scope of cost reduction in job costing, whereas, for process costing, there is a higher scope of cost reduction. Transfer cost is not considered in job costing when the job is shifted from one assignment to another. In the case of process costing, the cost of the previous processing stage is transferred to the next processing stage. Explain the differences between job-order costing and 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. Factory in Denton, Texas, the company can build over 100,000 unique versions of their semitrucks without making the same truck twice.

• Process costing also tracks prime costs to assign direct material and direct labor to each production department .
• Both process costing and job order costing maintain the costs of direct material, direct labor, and manufacturing overhead.
• You’ll also learn the concepts of conversion costs and equivalent units of production and how to use these for calculating the unit and total cost of items produced using a process costing system.
• Job-order costing and process costing has similarities and differences.
• These types of jobs usually require some sort of estimate for a customer or client.
• Unit costs are computed by department on the department production report.