What Is the Difference Between Job Order Costing and Process Costing?
Learn how companies choose between distinct cost tracking methods for unique goods versus homogenous, mass-produced items.
Cost accounting helps businesses understand and manage expenditures. Different production environments require distinct approaches to tracking costs for accurate financial reporting and decision-making. This article clarifies two primary costing methodologies: job order costing and process costing. Selecting the appropriate method ensures a business accurately captures production costs and analyzes profitability.
Understanding Job Order Costing
Job order costing is a method used when products or services are unique or produced in batches based on specific customer specifications. Businesses using this system accumulate costs for each individual job. The costs tracked for each job include direct materials, direct labor, and manufacturing overhead. These expenses are directly assigned to a specific job.
Industries that use job order costing include custom furniture manufacturers, construction companies, and specialized printing services. Advertising agencies, law firms, and accounting firms also apply this method, as each client’s project is distinct. A “job cost sheet” is the primary document for tracking these accumulated costs. This sheet details all expenses incurred for a particular job, enabling precise cost analysis.
Understanding Process Costing
Process costing is an accounting method applied when identical products are mass-produced through a continuous flow of production processes or departments. Costs in this system are accumulated by department or process rather than by individual units. This approach allows costs to be averaged over all units produced within a given period.
Industries that use process costing include chemical plants, food processing facilities, oil refineries, and beverage companies. Textile manufacturers and pharmaceutical companies also use this method. Products move sequentially through various stages, and costs transfer from one process to the next. “Equivalent units of production” helps allocate costs by converting partially completed units into a measure of fully completed units for a given period.
Comparing Cost Accumulation and Application
The cost flow differs between job order costing and process costing. Job order costing tracks costs per unique job, while process costing accumulates costs per department or process and averages them across identical units. This distinction arises from the nature of the products: custom or unique for job order costing versus homogeneous, mass-produced items for process costing.
In job order costing, cost accumulation occurs on a job cost sheet, detailing direct materials, direct labor, and allocated manufacturing overhead. Process costing accumulates costs within departmental production reports, aggregating them for a large batch or an entire period’s output. For job order costing, expenses move from raw materials, work-in-process (WIP), and finished goods inventory accounts for each specific job. In process costing, costs flow through WIP accounts for each department as products move through sequential production stages, transferring with the units.
Record-keeping also varies. Job order costing requires more detailed tracking for each individual job. Process costing aggregates costs, simplifying record-keeping for high-volume, standardized production. Reporting also differs; job order costing yields detailed job cost sheets for specific projects, providing a granular view of profitability. Process costing generates production cost reports for departments, focusing on average unit costs and overall departmental efficiency.
Deciding Between Costing Methods
A business determines the most appropriate costing method based on its production process and the type of product or service offered. If a company produces unique products or provides distinct services, job order costing provides detailed cost information for each specific order. This method is suitable when each unit or batch consumes resources differently.
Alternatively, if a business manufactures large quantities of identical products through a continuous process, process costing is more practical and efficient. This system is effective when it is not economically feasible to trace direct materials or labor to a specific unit. Some companies with diverse production lines may also adopt a hybrid costing system, combining elements of both job order and process costing to meet their varied accounting needs.