Job order costing vs process costing

Job order costing is a costing system used to calculate the costs incurred to complete an individual job or order. In a business that employs a job order costing system, each specific job or order is assigned a unique job number to distinguish it from the others. The costs incurred to complete each job are directly allocated to it.

Process costing is a costing system used to calculate the total as well as the per-unit cost at the end of a large production process, which generally runs through multiple departments. There are no individual or separate job orders in a process costing system. Any costs incurred are due to the whole production process, so the costs are part of the whole process.

Differences between job order costing and process costing:

The main differences between job order costing and process costing are given below:

1. Job order costing, as per the name, involves the costing for individual job orders. For every job completed in the factory, all direct costs (i.e., direct materials and direct labor) can be directly attributed to it. Process costing, on the other hand, involves the costing for larger production volumes. Under this system, the costs are allocated to the whole process rather than individual jobs.
2. Job order costing is used for the costing of products that are more unique and customizable. This is usually applied to small production orders. Process costing is used for the costing of more standardized products that are usually produced in large volumes.
3. Job order costing requires more record-keeping activities than process costing because the relevant costs are allocated separately to individual jobs. A separate job card is maintained for each job, which increases the number of entries required for record-keeping. In process costing, on the other hand, all the costs are aggregated and compiled because they relate to a single production process. After the aggregation, a portion of cost can be assigned to each unit of the product.
4. In a job order, the costs are ascertained for each job individually. As the jobs are independent of each other, the transfer of costs is not involved. In process costing, costs need to be transferred from one processing department to another.
5. Job order costing is suitable for industries where orders need to be completed for individual customers. Examples of such industries include furniture, fashion, wearing items, and a wide range of service-based firms. In these businesses, individual customers submit their job orders that need to be carved out for them. Process costing, on the other hand, is suitable for industries that need to produce large volumes of homogeneous products, e.g., sugar processing, pharmaceuticals, oil and coal refining, brick manufacturing, processed foods, etc.
6. In job order costing, individual job cards and time clocks are maintained to show the exact time the employees have spent on individual jobs, so that the labor cost could be directly attributed to each job. The process costing system does not maintain job cost sheets; rather, it relies on the output of each department. Under this costing system, a production report is prepared to show the work performed in each processing department.
7. In job order costing, the chance of arising work-in-process inventory is very small, and if it arises, it is for a specific job and not for the entire production of the factory. The process costing system will always record a work-in-process (WIP). This is because once production starts, goods are transferred between departments, and until finished, these goods are treated as work-in-process (WIP).

Similarities between job order costing and process costing:

Following are the similarities between job order costing and process costing:

1. Both job order costing and process costing systems are used to allocate expenses like direct materials, direct labor, and manufacturing overhead to the end products in a manufacturing process.
2. The inventory accounts used for recording accounting entries of production are almost the same for both costing techniques. Both the costing systems use basic accounts like materials, work-in-process, etc.
3. The method for treating over- or under-absorbed overheads in both costing systems is almost the same. As process costing does not have different batches, the costs are allocated systematically. Job order costing uses the same approach of assigning overheads to the individual jobs that the process costing system uses to assign to a whole production process.
4. The manufacturing accounts maintained to account for costs and inventory in both job order costing and process costing are also the same in both costing systems.
5. The basic information gathered to compute the per unit cost is almost the same in both costing systems. This data is used by the firm’s internal management for decision-making.

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