The difference between job costing and
process costing
Job costing involves the detailed accumulation of production costs attributable to specific units
or groups of units. For example, the construction of a custom-designed piece of furniture would
be accounted for with a job costing system. The costs of all labor worked on that specific item of
furniture would be recorded on a time sheet and then compiled on a cost sheet for that job.
Similarly, any wood or other parts used in the construction of the furniture would be charged to
the production job linked to that piece of furniture. This information may then be used to bill the
customer for work performed and materials used, or to track the extent of the company's profits
on the production job associated with that specific item of furniture.
Process costing involves the accumulation of costs for lengthy production runs involving
products that are indistinguishable from each other. For example, the production of 100,000
gallons of gasoline would require that all oil used in the process, as well as all labor in the
refinery facility be accumulated into a cost account, and then divided by the number of units
produced to arrive at the cost per unit. Costs are likely to be accumulated at the department level,
and no lower within the organization.
Given these descriptions of job costing and process costing, we can arrive at the following
differences between the two costing methodologies:
Uniqueness of product. Job costing is used for unique products, and process costing is
used for standardized products.
Size of job. Job costing is used for very small production runs, and process costing is used
for large production runs.
Record keeping. Much more record keeping is required for job costing, since time and
materials must be charged to specific jobs. Process costing aggregates costs, and so
requires less record keeping.
Customer billing. Job costing is more likely to be used for billings to customers, since it
details the exact costs consumed by projects commissioned by customers.
In situations where a company has a mixed production system that produces in large quantities
but then customizes the finished product prior to shipment, it is possible to use elements of both
the job costing and process costing systems, which is known as a hybrid system.
Job costing and process costing can be used in both manual and computerized accounting
environments.
Job Costing Vs Process Costing: The Key Differences
Job costing, also known as job order costing, and process costing are cost accounting systems
designed to help businesses keep track of all the costs they have to pay to produce a product or
deliver a service. The type of costing method you use depends on the type of business you’re
running.
What is Job Costing?
With the job costing approach, your business completes work on a project basis. The total cost
for each job is different. This is the case for plumbers, mechanics, freelancers, movers, and
anyone who works in a trade or provides customers an estimate before doing any work.
If you hire movers to move your items from one home to another – either local or long distance –
the moving company will estimate the labor costs, equipment, and anything else they need for
the project, along with a profit margin, then provide you with an estimate. Each job is different,
depending on the size of the home, whether or not the items are packed ahead of time or to be
packed in advance of the move, and the distance between homes.
Each job is a project that has its own distinct entity.
No job is the same. Each job will have to be done differently to successfully complete it.
Based on client requirements or needs.
The difference in work in progress exists in each period.
What is Process Costing?
Process costing is used when the products or services you offer are nearly identical or close to it.
Consider, for instance, a company that manufactures fabric face masks. Making the masks is a
process that requires material and labor, and costs are incurred as the product moves through
production and from one department to another. The fabric is cut into the correct shape, then
each mask is sewn, and then the masks are packaged for shipment.
The majority of companies produce more than one product, and they use process costing by
making batches of identical products, or at least highly similar products. Batch 1 might be 1,000
solid black masks, while batch 2 is 1,500 red and white striped masks.
The batches are a little different, and the manufacturer makes slight adjustments to switch
between products. The cost to change machine settings and to move in different materials – such
as a different type of fabric – is factored into the overhead cost for each product.
The process costing system is easier for business owners because it’s only necessary to track
costs for a particular batch of masks. Job costing, on the other hand, requires business owners to
manage multiple (sometimes hundreds or more) individual projects.
Setting Up a Costing System
Before you can set up an effective job or processing costing system, you have to separate direct
costs from indirect, or overhead costs.
Overhead costs are the most difficult to assign to products, and many businesses struggle to
analyze these costs. Overhead costs cannot be directly traced to products or services, which
makes them harder to track and manage. Utility costs and insurance premiums are examples.
Direct costs, on the other hand, can easily be traced to specific products or services. If you
manufacture face masks, you can calculate the amount of each fabric (raw materials) you use in
each mask for direct materials and the direct labor costs it takes to run the machines. Because of
this, labor and material costs are considered direct costs.
Blockquote: “The costing system you use determines how expenses are tracked, and may even
play a role in how you price your products and services.”
Differences Between Job Costing and Process Costing
Production: In job costing, production is customized, while it is standardized in process costing.
Assignment: In job costing, it is calculating the cost of each job. In process costing, the cost is
first determined by the process and then decided based on the number of units produced.
Reduction in Cost: With job costing, there are fewer scopes of reduction in costs; the opposite is
true with process costing.
Cost Transfer: Costs cannot be transferred in job costing, but can be transferred from one
process to another in process costing.
Individuality: Because all jobs are different from each other, all products have individuality in
job costing. Because process costing means products are produced in high volume, they lack
individuality.
Industry: Job costing is best for industries where products or services are customized based on
consumers’ demands. Process costing is best for mass production industries with standardized
products.
Losses: In job costing, losses are not separated, but with process costing, losses can be
separated.
Work in Progress: With job costing, there may or may not be any work in progress (WIP). With
process costing, there is always WIP at the beginning and end of a period.
Size of Job: Job costing is best for small production units, while process costing is best for large
production units.
Record Keeping: For job costing, keeping records is tedious and time-consuming, but process
costing keeps things streamlined and efficient.
