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Written by Cecilia Chee, Singapore   
Tuesday, 04 October 2011 10:56

 

 

Job Costing vs Process Costing

 

Job costing (known by some as job order costing) is fundamental to managerial accounting. It differs from Process costing in that the flow of costs is tracked by job or batch instead of by process.

The distinction between job costing and process costing hinges on the nature of the product and, therefore, on the type of production process:

  • Process costing is used when the products are more homogeneous in nature. Conversely, job costing systems assign costs to distinct production jobs that are significantly different. An average cost per unit of product is then calculated for each job.
  • Process costing systems assign costs to one or more production processes. Because all units are identical or very similar, average costs for each unit of product are calculated by dividing the process costs by the number of units produced.
  • Many businesses produce products with some unique features and some common processes. These businesses use costing systems that have both job and process costing features.

 

Job Costing Vs Process Costing: Prime Differences


At the outset, let me define what is job costing. It is a cost accounting method wherein the overall cost of manufacturing a product is determined according the job type. It involves the calculation and summing up of raw material cost, labor cost and other expenses involved in the manufacturing of a single type of product, to determine the cost of production per finished product. 

It is used in industries which produce multiple types of products in different batches, according to customer requirements. The cost of manufacturing per product is determined by dividing the total job or batch cost, by the number of jobs manufactured. All the data is tabulated in customized 
job cost sheets.

Process costing is an accounting method used in industries which mass produce identical items in thousands or even millions. Since the product created is the same and the process of manufacturing is the same, there is no need to account for the cost of each job separately. Hence, process costing involves the valuation of the entire process costs. To obtain the cost of manufacturing per product, the process cost is divided by the total number of finished products. 

Thus the distinction between the two accounting methods lies in the fact that job costing calculates price according to finished product, while process costing focuses on the entire processing costs only, as the finished product is the same. 

Process costing can determine the running costs of each department involved in manufacturing, for a fixed period of time, as the final product cost remains unchanged. On the other hand, job costing is used when customized products are created that differ in their manufacturing process. Due to the homogeneous nature of products, process costing is simpler compared to job costing which needs individual analysis for every job type. 

Hope this job costing vs process costing comparison has left no doubt in your mind about how these accounting methods are different. The prime difference between the two methods to be remembered is that job costing is best suited for an industry that creates a range of different products, while process costing is ideally suited for industries that mass produce the same item in a large number. If there is diversity in products, it makes sense to calculate expenses through job costing and when an identical product is manufactured, using process costing makes sense.

Last Updated on Tuesday, 04 October 2011 12:35
 
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