Difference Between Job Costing and Process Costing
Job costing and process costing are two different methods of accumulating and assigning costs to units of production. The main difference lies in the type of product or service the company produces and the production process.
- Job costing is used when products or services are unique, and production is carried out against specific customer orders. Each order or job is treated as a separate cost unit.
- It is used by companies that provide customized, unique products or services, such as custom furniture manufacturers, construction companies, advertising agencies, consulting firms, or movie production studios.
- Costs are accumulated by individual jobs, and each job has a separate job cost sheet which tracks the direct materials, direct labor, and overhead costs associated with that job.
- It allows for more specific tracking of costs and profitability by job, and it’s helpful for managing and pricing unique, custom orders.
- Process costing is used when identical or similar products are mass-produced, and production is continuous. The cost unit is a process or a stage of production, rather than a distinct job.
- It is used by companies in industries like oil refining, food manufacturing, chemical production, or any other industry where a series of processes is used to produce homogeneous products.
- Costs are accumulated by processes or departments, and they are distributed evenly across all units produced during the period, resulting in an average cost per unit.
- It provides less detail on individual units’ costs, but it allows for efficient cost calculation in industries where tracking individual units would be impractical or impossible due to the homogeneous and continuous nature of production.
In summary, the choice between job costing and process costing depends largely on the nature of the product or service being produced and the production process. A company might even use a combination of both, known as hybrid or mixed costing, if it has some products that are mass-produced and others that are custom-made.
Example of the Difference Between Job Costing and Process Costing
Job Costing Example:
A construction company building custom homes uses job costing. Each house is a unique job with its own set of costs. For example, when building a house for Client A, they would accumulate all the direct material costs (lumber, cement, wiring, etc.), direct labor costs (hours worked by carpenters, electricians, etc.), and allocate overhead costs (depreciation on equipment, site manager salary, etc.). These costs would be tracked separately from the costs of a house being built for Client B. This allows the company to track the cost and profitability of each individual project.
Process Costing Example:
A cereal manufacturer uses process costing. The company produces large amounts of cereal in a continuous process that includes several steps, such as mixing, cooking, and packaging. The costs of raw materials (grains, sugar, etc.), labor (machine operators, packers, etc.), and overhead (factory depreciation, utilities, etc.) are all accumulated for each process. These total costs are then divided by the number of units produced to find the average cost per unit of cereal. In this scenario, it’s not feasible or necessary to track the cost of producing each box of cereal separately, as each box within the same production run is identical.
These examples illustrate how job costing is used for unique, individual jobs, while process costing is used for mass production of identical or similar items.