The job order costing system is a costing method that is used to calculate the costs attached to an individual job or order. In a business applying job order costing, each job or order is assigned a job number to distinguish it from the others. Costs related to each job are allocated directly to each specific job.
The process costing system is a costing method that is used to calculate unit costs for the finished goods at the end of a large production process. There exist no individual or separate orders and so no individual allocation of costs is required. Any costs incurred is due to the whole production process and so all the costs make part of the end product.
Similarities between job order costing and process costing:
Following are the similarities between job order costing and process costing:
- Both job order costing and process costing systems are used to allocate expenses like material, labor, overheads (production and/or non-production) to the end products in a manufacturing process.
- 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-progress (in the case of job costing; if any) etc.
- 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. The job order costing uses the same approach of assigning overheads to the individual jobs that process costing system uses to assign to a whole production process.
- The t-accounts also referred as manufacturing accounts that are maintained in both the job order costing and process costing like direct material, direct labor and production overheads are also the same in both the costing systems.
- The basic information that is gathered to reach the unit cost, which is calculated in both of the costing systems is almost the same and is valuable for internal management of the business. This data is utilized by the management of the business for decision-making purposes.
Differences between job order costing and process costing:
The main differences between job order costing and process costing are given below:
- job order costing as per the name, involves costing for individual job orders. This means that for every job completed by a factory direct costs (material, labor) can be directly attributable to each individual job. Process costing on the other hand is the costing for larger volumes. The costing is done for a huge process and costs are allocated to process rather than individual jobs.
- The job order costing is used for the costing of products that are more unique and customizable. This is usually applied to small production orders. The process costing is used for the costing of more standardized products that are usually produced in large volumes.
- The job order costing requires more record keeping activities than process costing. This is because in job order costing all the relevant costs are allocated separately to individual jobs and as for every job a separate job card is maintained, the amount of entries increase. While in process costing all the costs are aggregated and compiled, because all the costs relate to a single process of production. After the aggravation, the cost is assigned to each product.
- In job order costing the costs are ascertained for each job individually, and as each job is independent of the other no transfer of costs is needed. However, in process costing costs need to be transferred from one process to the other.
- job order costing is suitable for industries where orders need to be completed for individual customers’ i.e. unique furniture, fashion industry etc. and service-based industries e.g. hospitals, firms (law, tax, audit, counseling etc.), investment companies etc. because in these businesses an individual customer usually represents a single job and each job needs to be carved for each individual customer. process costing on the other hand is suitable for the industries that need to produce large volumes of homogeneous products e.g. pen manufacturers, pharmaceuticals, oil and coal refining, brick manufacturers, processed food manufacturers and packagers etc.
- In process costing, no job cost sheets are maintained as the production focus in this method relies upon the output of departments. A productions report is extracted which shows the work performed by each department during the manufacturing process. In job order costing, individual job cards and time clocks are maintained by the labor, which shows the exact time an employee has spent on an individual job, so that the labor cost could be attributed directly to these jobs.
- The process costing system will always record a work-in-process (WIP). This is because once the production starts, goods are transferred between departments and until finished these goods are treated as work-in-process (WIP). Although a percentage is allocated to these unfinished goods. While in job order costing, the chance of work-in-progress arising is very small and if it arises it is for a specific job and not for the entire production of the factory.