The difference between job costing and process costing
/What is Job Costing?
Job costing involves the detailed accumulation of production costs attributable to specific units or groups of units. For example, the construction of a custom-designed piece of furniture would be accounted for with a job costing system. The costs of all labor worked on that specific item of furniture would be recorded on a time sheet and then compiled on a cost sheet for that job. Similarly, any wood or other parts used in the construction of the furniture would be charged to the production job linked to that piece of furniture. This information may then be used to bill the customer for work performed and materials used, or to track the extent of the company's profits on the production job associated with that specific item of furniture.
What is Process Costing?
Process costing involves the accumulation of costs for lengthy production runs involving products that are indistinguishable from each other. For example, the production of 100,000 gallons of gasoline would require that all oil used in the process, as well as all labor in the refinery facility be accumulated into a cost account, and then divided by the number of units produced to arrive at the cost per unit. Costs are likely to be accumulated at the department level, and no lower within the organization.
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Job Costing vs. Process Costing
Given these descriptions of job costing and process costing, we can arrive at a number of differences between the two costing methodologies, which are as follows:
Uniqueness of product. Job costing is used for unique products, and process costing is used for standardized products. Thus, job costing tends to be used for small production volumes, while process costing is used for large production volumes. This implies that a smaller business might be more likely to use job costing, while a larger one would be more likely to use process costing.
Size of job. Job costing is used for very small production runs (or even single-unit jobs), and process costing is used for large production runs. Thus, a standardized product that is manufactured in bulk is more likely to be tracked with a process costing system.
Record keeping. Much more record keeping is required for job costing, since time and materials must be charged to specific jobs. Process costing aggregates costs, and so requires less record keeping. The record keeping in both cases is essential, since a customer’s auditors may want to examine it to prove that the cost-based prices billed to the customer are reasonable.
Customer billing. Job costing is more likely to be used for billings to customers, since it details the exact costs consumed by projects commissioned by customers. This is the case when the seller is billing based on cost, as is the case with a cost-plus pricing arrangement.
Hybrid Systems
In situations where a company has a mixed production system that produces in large quantities but then customizes the finished product prior to shipment, it is possible to use elements of both the job costing and process costing systems, which is known as a hybrid system.