5 1: Compare and Contrast Job Order Costing and Process Costing Business LibreTexts

Job order costing provides customizable cost control for low-volume complexity. Process costing simplifies assumptions for mass production scale and consistency. A grocery store’s analysis of a recent customer survey finds an increasing number of customers interested in being able to custom-order meals to go. Maria sees this as an opportunity to enter a niche market for busy families or individuals who want home-cooked meals with a variety of options and combinations, but who have little time. Maria already has an expansive deli, bakery, and prepared foods section in the store and sees this opportunity as a viable option to increase sales and its customer base.

Differences between job order costing and process costing

• For example, in the case of a mass-produced clothing item, such as jeans, a company like Levi’s will track costs for a batch of jeans rather than for a pair of jeans.
• In contrast, period costs are not directly related to the production process and are expensed during the period in which they are incurred.
• Process costing is optimal when the costs cannot be traced directly to the job.
• Making the masks is a process that requires material and labor, and costs are incurred as the product moves through production and from one department to another.
• Job order costing is an accounting system that traces the individual costs directly to a final job or service, instead of to the production department.
• After Hannah determines her overhead costs and decides on activity level she allocates those costs for each unit.

So a manufacturer doing short specialty batch runs would use job costing. But a company cranking out high volumes of the same item could apply process costing. Job order costing provides an accurate assessment of costs and profits across different jobs.

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Process costing also tracks prime costs to assign direct material and direct labor to each production department (batch). Both process costing and job order costing maintain the costs of direct material, direct labor, and manufacturing overhead. The management of each business relies on knowing each cost when making decisions, such as setting the sales price, planning production and staffing schedules, and ordering materials. Although these companies share a common location, which suggests similar rental costs, all the other costs vary significantly. Because of these cost differences, each company must have a system for gathering its cost data.

Job Order Costing

Job order costing is better suited for businesses that produce customized, low-volume products. It tracks costs for each unique job and provides more accurate cost data when production differs across orders. Process costing works better for high-volume, continuous production with standardized outputs, averaging costs compare and contrast job-order and process costing systems across production runs. Job order costing, process costing, and activity-based costing are three common product costing methods used in manufacturing. Each method has its own strengths and applications depending on the production environment. For example, a soda manufacturer would track costs by each major step – mixing, bottling, labeling.

Chemical Manufacturing and Consistent Costing

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• A cereal company, for instance, would track the total costs for a production run and divide that by the number of boxes produced.
• Even two sticks made sequentially may have different weights because the wood varies in density.
• Job order costing and process costing are two important cost accounting systems used by manufacturing companies.
• Regardless of the costing system used, manufacturing costs consist of direct material, direct labor, and manufacturing overhead.
• The cost of the increase in equipment (typically reflected as a depreciation expense) is allocated to overhead, while the decreased need for labor usually reduces the direct labor cost.
• It is one of the main job order costing examples used in specialized or custom manufacturing.
• For example, a chemical plant, a paper mill, or a bakery might use this system.

On the other hand, Process Costing is used for continuous and repetitive production, where products or services are homogeneous. This fundamental difference in production type leads to variations in cost allocation methods. Cost accounting is an essential aspect of financial management for businesses. It helps in determining the cost of producing goods or services, analyzing profitability, and making informed decisions.

In summary, apply job order costing for low-volume, customized production when traceability is needed. Use process costing for mass production with homogeneous output to reduce cost. In all these examples, job order costing is ideal for gaining per-unit cost insights due to specialized, low-volume production. By allocating costs directly to individual jobs, managers gain precise understanding of profitability across contracts.