Lesson 85 - Beginner accounting course

85. Introduction to Job Order and Process Costing

Job order costing and process costing are two fundamental methods of cost accounting used by businesses to track production costs. The choice between them depends on the nature of production and the way costs are accumulated and assigned.

1. What is Job Order Costing?

Job order costing is used when products are custom-made, unique, or produced in small batches. Costs are accumulated separately for each job or order. This method is common in industries where each product or service is different, such as construction, custom manufacturing, and consulting services.

Characteristics of Job Order Costing:

✔ Costs are assigned to specific jobs.
✔ Each job has a unique cost sheet.
✔ Direct materials, direct labor, and overhead are tracked per job.
✔ Used in custom manufacturing, special projects, and services.

Example of Job Order Costing:

A furniture company receives a custom order for a handcrafted table. The costs assigned to the job are:

Since the product is unique, its cost is calculated separately. 

2. What is Process Costing?

Process costing is used when identical products are mass-produced in a continuous flow. Instead of tracking costs per job, costs are accumulated for an entire production process and then assigned to units of output. Industries such as food processing, chemicals, and textiles commonly use this method.

Characteristics of Process Costing:

✔ Costs are assigned to departments or processes, not individual jobs.
✔ Production is continuous and standardized.
✔ Average cost per unit is calculated.
✔ Used in industries like oil refining, pharmaceuticals, and canned goods production.

Example of Process Costing:

A company produces 10,000 bottles of shampoo in a month. The total costs for the production process are:

Each bottle costs $10, and all costs are spread evenly across production. 

3. Key Differences Between Job Order and Process Costing 

4. When to Use Job Order vs. Process Costing

• Use Job Order Costing if:
  ✔ Products are custom-made or vary significantly.
  ✔ Direct materials and labor costs differ between products.
  ✔ Each job needs a separate cost calculation.

• Use Process Costing if:
  ✔ Products are identical and produced in large quantities.
  ✔ Production is continuous and standardized.
  ✔ It is difficult to track individual product costs.

5. Hybrid Costing Systems

Some businesses use a mix of job order and process costing, known as a hybrid system. For example, an automobile manufacturer might use process costing for making car frames but job order costing for custom interior designs.

6. Conclusion

Both job order costing and process costing help businesses track and control costs, but the choice depends on production methods. Job order costing is best for custom products, while process costing works for large-scale, continuous production. Understanding these systems helps businesses make informed pricing, budgeting, and cost management decisions.