How Does Job Costing Differ From Process Costing?

Cost accounting provides businesses with frameworks to understand how money is spent in producing goods or delivering services. Accurately tracking these expenditures helps organizations make informed decisions about pricing, efficiency, and resource allocation. Two primary methods for achieving this cost tracking are job costing and process costing, each suited to different types of operational structures and product characteristics. The choice between these methods depends largely on the nature of the items being produced or the services being rendered.

What is Job Costing?

Job costing is an accounting method used to determine the cost of producing unique products or services. Each individual job or batch is treated as a separate cost object, meaning all direct materials, direct labor, and manufacturing overhead are specifically assigned to that particular job. This method provides a detailed, individualized cost for every unique output.

Industries that frequently use job costing include construction companies building custom homes, printing shops fulfilling specific print orders, or film production studios creating a single movie. Service-oriented businesses such as consulting firms, advertising agencies, and auditing firms also employ job costing to track expenses for each client engagement.

Costs are accumulated on a job cost sheet. This sheet details the direct materials requisitioned for the job, the direct labor hours spent and their associated wages, and a portion of the indirect manufacturing overhead applied using a predetermined rate. For instance, a custom cabinet maker would track the specific wood, hinges, and labor for one kitchen remodel project separately from another.

What is Process Costing?

Process costing is a method used when homogeneous, identical products are mass-produced in a continuous flow through a series of sequential production departments or processes. Unlike job costing, individual units are indistinguishable, and costs are accumulated by the department or process rather than by specific units. This method averages costs over large volumes of output.

This costing approach is common in industries like chemical manufacturing, food processing, oil refining, and beverage production, where products like gasoline, soda, or flour are produced in continuous, large-scale operations. Textile manufacturers and assembly line operations also rely on process costing because their output consists of uniform items produced repeatedly.

Costs flow from one processing department to the next, with each department adding materials, labor, and overhead. For example, in a beverage plant, the bottling department receives the liquid from the mixing department, and then adds bottles and caps. The total costs incurred within each department during a period are then divided by the number of units produced in that period to determine an average cost per unit for that specific process.

Comparing Job Costing and Process Costing

Job costing applies to unique outputs, while process costing is suited for homogeneous, mass-produced items. This distinction dictates how costs are accumulated and reported, offering different insights into production expenses.

In job costing, the cost object is an individual job or batch, requiring distinct cost tracking. Conversely, process costing treats a production department or process as the cost object, accumulating costs for all units that pass through it. This leads to different approaches in documentation, with job costing utilizing detailed per-job records, such as individual job cost sheets, to itemize expenses for each unique output.

Process costing relies on production reports for each processing department, which summarize costs across many identical units. The flow of costs also varies significantly; job costing traces direct materials, direct labor, and manufacturing overhead directly to specific jobs before they become finished goods. In contrast, process costing involves costs flowing sequentially from one processing department to the next, with each department adding its own costs to the accumulating total.

Job costing determines unit cost by dividing the total cost of a specific job by the number of units completed within that job. Process costing calculates an average unit cost by dividing the total costs incurred in a department by the number of units produced in that department during a period. Businesses choose between these methods based on whether their operations involve custom orders or continuous, standardized production, impacting their cost control and pricing strategies.