Job-Order Costing

Job-order costing is a cost system that is used to accumulate costs by jobs.

These jobs could also be called batches, as each job is generally a
“batch” of similar products. Each batch should be individualized in
some way to make it differentiated from other batches for it to be a
separate job. If batches were all identical, another type of costing
would be more appropriate.

The Job-Order Costing Process

When a company operates using job-order costing, a specific set of events
will usually occur with each job. Generally, the process is as follows:

• An order (or sales order) is received for the batch of products

• A production order is issued from the sales order
• Materials and labor are ordered and tracked for the set of products
• Manufacturing overhead is allocated to the job using a predetermined
rate (usually per labor hour or per machine hour)
• Actual manufacturing overhead will not affect the work-in-process
account, instead it is charged to a control account
• Direct labor and materials are charged by the accountant to the work-
in-process accounts using the actual amounts incurred
• These amounts are all tracked using a job-costing sheet, which will
most likely be in a computerized format and a subsidiary ledger is kept
for each job
• Abnormal spoilage (spoilage that is above and beyond what would be
expected from the job) is considered a period cost and is reclassified
from the work-in-process account into a separate account so it can be
addressed by management.

When Is Job-Order Costing suited?

Job-order costing is a type of costing that can be used in many different
industries, although not all. Industries that sell items in batches will be able
to use job-order costing most effectively. For example, a T-shirt company that
makes batches of T-shirts with company logos on them may use job-order
costing, each company they work for could be classified as an individual job.
Job-order costing would probably not be used in other industries such as
general manufacturing, as products may not be specialized and therefore
would not be classified in batches.

Process Costing?
Process costing is a type of costing system that is used for uniform, or
homogeneous, products. Process costing averages the costs over all units to
come to the per unit cost. This is in contrast to other types of costing
systems, such as job-order costing that is used for products that are in
differentiated batches. Unlike job-order costing, process costing is tracked
using a work-in-process account for each department, rather than through
subsidiary ledgers.

Process Costing Mechanism

Process costing systems follow specific procedures, and while exact
procedures may vary by company or by industry, they will generally follow
these steps:

• While other types of costing start with a sales order, a sales order is
not needed for process costing as it is a continuous process
• The work-in-process accounts are divided by department and are
named as such – for example: Work-in-process – Department Name
• The first department in the process makes the first entry into the
work-in-process account, generally for the direct raw materials
• As the products move from department to department, entries are
made to each work-in-process department account
• Direct labor costs are recorded by period
• Actual overhead costs are recorded; no contra-account is needed
because there is no over- or under-applied overhead due to the
actual cost being applied
• Indirect costs are applied to the overhead account in actual
amounts

When Is Process Costing Suited?

Process costing is appropriate when products are homogeneous (or identical).
Where job-order and other types of costing seek to find the cost per unit for
batches of differentiated products, process costing seeks to find the average
cost of all units over a period of time. Therefore, process costing is only
appropriate when all units are the same. For example, a manufacturing
company that produces only one homogeneous product may elect to use
process costing.

Advantages & Disadvantages of Job Order Costing &

Process Costing

• Assigning Costs

One advantage of job order costing is that it allows managers to calculate the
profit earned on individual jobs, helping them to better ascertain whether
specific jobs are desirable to pursue in the future. This is best for businesses
that do highly custom work, such as construction contractors and
consultants. An advantage of process costing is that it allows managers to
get detailed information on the production statistics of individual
departments or workgroups. This is best suited for continuous manufacturing
settings, such as factories and utility companies.

• Record Keeping

A disadvantage of job order costing is that employees are required to track

all materials and labor used during the job. Process costing simplifies record
keeping by relying on statistical calculations rather than actual inputs. As an
example, consider a construction contractor using a job order costing system.
The contractor has to keep track of all the wood, nails, screws, electrical
fixtures, paint and other materials used on the job, as well as tracking
workers' lunch breaks and hours worked. In a factory setting, on the other
hand, materials are calculated using an average of units produced, and
salaries expenses are often relatively consistent between pay periods.

• Reporting

Job order costing gives managers the advantage of being able to keep track
of individuals' and teams' performance in terms of cost-control, efficiency and
productivity. Process costing, on the other hand, gives managers the
advantage of being able to ascertain the same qualities in entire
departments and compare performance over time.

• Unit Cost Calculation

Job order and process costing are adequate to determine the average cost of
each unit produced. According to mdc.edu, the formula for unit cost
calculation in a job order costing system is: Unit Cost = Total Job Cost /
Number of Units Produced in Job In many cases, such as the construction
contractor example, only one unit is technically being produced per job---in
this case one deck or one bathroom remodeling. The formula for unit cost
calculation in a process cost system is: Unit Cost = Department's Periodic
Cost / Number of Units Produced in the Period Unit cost considerations are
generally more relevant in situations suited for process costing.
Similarities between Job Order and Process
Costing System:
Learning purpose of this article:
1. Both systems have the same basic purposes-to assign material, labor,
and overhead costs to products and to provide mechanism for
computing unit product cost.
2. Both systems use the same basic manufacturing accountants,
including manufacturing overhead, Raw materials, Work in process,
and Finished Good.
3. The flow of costs through the manufacturing accounts is basically the
same in both systems.

Process Costing Vs. Job Order Costing

Manufacturers use different types of costing systems to allocate production
costs to their products and services. Two types of common product costing
systems are process costing and job-order costing. While each system applies
the same production costs to products, there are distinct variances in the
application method.

Processes to products based on the process they go through in the

manufacturing process. Each process has a standard amount of
overhead, labor and materials that are applied to each batch run the
individual manufacturing processes. Reconciliations are used after
batches are processed to ensure that all appropriate costs are applied to
the manufactured goods.

Uses
o Process costing is primarily used in the production of
homogeneous goods through repeated manufacturing processes.
Products that use process costing include beverages, food, nails and
screws. These items are processed through individual processes where
costs are applied to each batch of produced goods. Manufacturers
must be careful in streamlining their manufacturing process to ensure
that each batch has production costs applied in similar amounts.

Job-Order Costing
o Job-order costing is methods where overhead, labor and material
are applied to different products, based on how much of each
production material are used. Some items may use more labor, while
other products may require more raw materials. Costs are applied,
based on the cost of each portion of materials used, rather than
through the production process used to manufacture the good.
 Manufacturers who produce several different types of goods will use
job-order costing.

Uses
o Products like clothing, repair shops and hospitals all use a form
of job-order costing. These companies have readily identifiable raw
material costs that can be applied directly to each unit produced or
serviced. Labor is also identifiable to each product because of the
differences in the products produced. Most companies use job-order
costing because of the various products they produce and the different
manufacturing processes needed for each product.

Overhead Application
o Process costing is the best costing method when producing large
amounts of similar items. Casts are applied at the production process
level, creating simple cost allocations for manufacturers. Overhead is
applied by each department as the products are moved through the
individual production processes.
Job-order costing may use several different types of overhead
application processes, based on the cost driver of the manufacturer.
Cost drivers are selected by accountants as the best way to apply
overhead, based on how the products are produced. Number of direct
labor hours, machine hours or activities is common cost drivers for job-
order costing. Overhead is applied by dividing the amount of overhead
by the total number of costs drivers used when producing products

Difference between Job Order and Process

Costing:
The differences between job order costing and process costing arise from two
factors. The first is that the flow of units in a process costing system is more
or less continuous, and the second is that these units are indistinguishable
from one another. Under process costing it makes no sense to try to identify
materials, labor, and overhead costs with a particular order from a customer (
as we do with job order costing ), since each order is just one of many that
are filled from a continuous flow of virtually identical units from the
production line. Under process costing, we accumulate costs by department
rather than by order, assign these costs uniformly to all units that pass
through the department during a period.

A further difference between the two costing systems is that the job cost
sheet is not used in process costing, since the focal point of process costing is
on departments. Instead of using job cost sheet a production report is
prepared for each department in which work is done on products. The
production report serves several functions. It provides a summary of number
of units moving through a department during a period, and it also provides a
computation of unit costs. In addition it shows what costs were charged to
the department and what disposition was made on these costs. The
department production report is a key document in a process costing system.

These differences are summarized below:

Job Order Costing Process Costing

1. Many different jobs are worked
on during each period, with
each job having different
production requirements.
2. Costs are accumulated by
individual job.
3. Job cost sheet is the key
document controlling the
accumulation of costs by a job.
1. A single product is produced
either on continuous basis or for
long periods. All units of product
are identical.
2. Costs are accumulated by
departments.
3. The department production
report is the key document
showing the accumulation and
disposition of costs.

4. Unit costs are computed by job 4. Unit costs are computed by

on the job cost sheet. department on the department
production report