4.1 Distinguish between Job Order Costing and Process Costing
2 min read•june 18, 2024
and are two key approaches to tracking production costs. is used for unique, customized products, accumulating costs for each job separately. is used for standardized products made in continuous processes, accumulating costs by department or process.
These costing methods differ in how they track and assign costs. Job order costing uses and traces costs directly to specific jobs. Process costing averages costs over total units produced in each process. Understanding these approaches helps managers choose the right method for their production environment.
Job Order Costing vs Process Costing
Characteristics of costing systems
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- Job order costing
- Tracks costs for unique, customized products or services (, )
- Accumulates costs separately for each individual job or
- Fits companies with diverse product lines or customer-specific orders (, )
- Process costing
- Tracks costs for homogeneous, standardized products manufactured in a continuous process (, )
- Accumulates costs for each process or department over a specific time period
- Fits companies with mass production of similar products (, )
Cost tracking in costing methods
- Job order costing
- Uses job cost sheets to accumulate and assign costs to specific jobs
- Traces and costs directly to individual jobs ()
- Allocates to jobs using a
- Maintains inventory for each job until completion
- Process costing
- Accumulates and assigns costs to departments or processes for a specific time period
- Averages costs over the total units produced in each process
- Employs to allocate costs to partially completed units
- Transfers costs from one process to another until the products are completed
Applications of costing approaches
- Job order costing suits situations with
- Unique, customized, or made-to-order products or services (, )
- Intermittent or non-continuous production
- Examples: ,
- Process costing suits situations with
- Homogeneous products produced in large quantities (, )
- Continuous production following a standardized process ()
- Examples: ,
Cost Accumulation and Assignment
- : The process of collecting cost data in an organized way
- : The process of attributing costs to cost objects
- : Groups of individual cost items that are allocated together (e.g., manufacturing )
- : The process of assigning indirect costs to cost objects using
- Cost drivers: Factors that cause a change in the cost of an activity (e.g., machine hours, hours)
Key Terms to Review (55)
Aircraft Manufacturing: Aircraft manufacturing is the process of designing, constructing, and assembling various types of aircraft, including airplanes, helicopters, and other flying vehicles. It involves a complex and specialized set of engineering, production, and quality control techniques to ensure the safety, reliability, and performance of the final product.
Automotive Repair Shops: Automotive repair shops are commercial establishments that specialize in the maintenance, repair, and servicing of motor vehicles, including cars, trucks, and other automotive equipment. These shops play a crucial role in ensuring the proper functioning and safety of vehicles by providing a wide range of services to their customers.
Batch: A batch is a specific quantity of a product or service that is produced or processed together as a group. It is a fundamental concept in both Job Order Costing and Process Costing, as it relates to how costs are accumulated and assigned to the units being manufactured.
Beer Brewing: Beer brewing is the process of producing beer, a popular alcoholic beverage, by fermenting starch-rich grains such as barley, wheat, or rice. This process involves various steps, including malting, mashing, boiling, fermentation, and conditioning, to transform the raw ingredients into the final beer product.
Breakfast Cereal: Breakfast cereal is a processed food made from processed grains that is commonly consumed as a breakfast item. It is typically served with milk and is known for its convenience, variety of flavors, and ability to provide a quick source of carbohydrates and other nutrients to start the day.
Cement Production: Cement production is the process of manufacturing cement, a binding agent used in the construction industry. It involves the careful selection and preparation of raw materials, the controlled heating and cooling of the mixture, and the final grinding and packaging of the cement product. This process is a crucial component in both Job Order Costing and Process Costing systems, as the production of cement is a key input for many construction projects.
Chemical Manufacturing: Chemical manufacturing is the process of transforming raw materials or intermediate products into finished chemical products through a series of chemical reactions and physical processes. This industry plays a crucial role in the production of a wide range of products, from pharmaceuticals and personal care items to industrial chemicals and fuels, that are essential for modern society.
Chili’s: Chili’s is a casual dining restaurant chain that uses job order costing to track the costs of preparing individual orders. Each meal or customer order can be treated as a separate job, allowing for precise cost allocation.
CITGO: CITGO is a large, vertically integrated petroleum corporation that engages in refining, marketing, and transporting gasoline, lubricants, petrochemicals, and other industrial products. CITGO's operations can be studied to understand cost allocation in complex production environments.
Construction Projects: Construction projects refer to the planning, design, and execution of building or infrastructure undertakings, involving the coordination of various resources, processes, and stakeholders to create a physical structure or facility. These projects are central to the field of managerial accounting, as they require careful cost management and analysis to ensure successful completion within budget and timeline constraints.
Cost Accumulation: Cost accumulation is the process of collecting and organizing costs associated with a specific cost object, such as a product, service, or job, in order to determine the total cost of that object. This term is particularly relevant in the context of job order costing and process costing, where costs are tracked and assigned to individual jobs or production processes.
Cost Allocation: Cost allocation is the process of assigning indirect or overhead costs to specific cost objects, such as products, services, or departments, based on a rational and systematic method. It is a crucial concept in managerial accounting that helps organizations accurately determine the true cost of their operations and make informed decisions.
Cost Assignment: Cost assignment is the process of allocating costs to specific cost objects, such as products, services, or activities, based on the consumption or usage of resources. It is a fundamental concept in managerial accounting that is crucial for understanding and managing costs in organizations, particularly in the context of job order costing and process costing.
Cost Drivers: Cost drivers are the factors that directly influence the incurrence of costs within an organization. They are the underlying causes that determine the level of resources consumed and the resulting costs associated with business activities or operations. Cost drivers play a crucial role in various managerial accounting concepts, including the estimation of variable and fixed costs, the application of job order and process costing methods, the calculation of activity-based product costs, and the analysis of overhead variances.
Cost Pools: Cost pools are groups of indirect costs that are accumulated and then allocated to cost objects, such as products, services, or departments, based on a common cost driver. They are an essential component in various costing methods, including job order costing and activity-based costing, as they help to accurately assign overhead costs to the appropriate cost objects.
Cost Tracing: Cost tracing is the process of directly assigning costs to a specific cost object, such as a product, service, or department. It involves identifying and tracking the specific resources and activities that contribute to the production or delivery of a particular cost object, allowing for accurate cost assignment and analysis.
Custom Cabinetry: Custom cabinetry refers to the design and construction of cabinets that are tailored to the specific needs and preferences of a customer, rather than being mass-produced or standardized. These cabinets are typically made-to-order and can be customized in terms of size, shape, materials, finishes, and features to suit the unique requirements of a particular space or application.
Custom Furniture: Custom furniture refers to pieces that are designed and manufactured specifically for an individual customer's needs, preferences, and space requirements, rather than being mass-produced or pre-designed. These unique furnishings are typically created by skilled craftsmen or specialized furniture makers to meet the unique specifications of the client.
Custom Software Development: Custom software development is the process of designing, building, and deploying software applications that are tailored to the unique requirements and needs of a specific organization or individual. It involves creating bespoke solutions that are not available off-the-shelf, allowing for greater flexibility, scalability, and integration with existing systems.
Direct labor: Direct labor refers to the wages and salaries of employees who are directly involved in the production of goods or services. This cost is directly traceable to specific products or jobs within a manufacturing environment.
Direct Labor: Direct labor refers to the cost of the workforce directly involved in the production of goods or the provision of services. It encompasses the wages and salaries paid to employees who physically transform raw materials into finished products or perform tasks that are essential to the completion of a service.
Direct materials: Direct materials are raw materials that can be directly traced to the production of a specific product. These materials are essential components in manufacturing and are included in the cost of goods sold.
Direct Materials: Direct materials are the raw materials that can be directly traced to the production of a specific product. They are a key component of product costs, along with direct labor and manufacturing overhead, and are a crucial element in understanding the differences between merchandising, manufacturing, and service organizations, as well as the various costing methods used in managerial accounting.
Dow: The Dow, short for Dow Jones Industrial Average (DJIA), is a stock market index that measures the stock performance of 30 large, publicly-owned companies in the United States. It is often used as an indicator of the overall health of the U.S. economy and financial markets.
Equivalent Units of Production (EUP): Equivalent Units of Production (EUP) is a concept used in process costing to measure the progress of incomplete units in the production process. It represents the number of fully completed units that could have been produced from the total work done on all units, both finished and unfinished, during an accounting period.
Expense recognition principle: Expense recognition principle dictates that expenses should be recorded in the period in which they contribute to revenue. This principle ensures that financial statements accurately reflect the company’s financial performance.
Fixed factory overhead variance: Fixed factory overhead variance is the difference between the budgeted fixed manufacturing overhead and the actual fixed manufacturing overhead incurred. It measures how well a company controls its fixed overhead costs in comparison to its budgeted expectations.
Flow of goods through production: The flow of goods through production refers to the movement and transformation of raw materials into finished products. It involves various stages such as purchasing, manufacturing, and distribution in a sequential manner.
Food Processing: Food processing refers to the transformation of raw agricultural products into food or food ingredients that are suitable for human consumption or further processing. It involves a series of physical, chemical, and biological processes that convert natural food items into more convenient, palatable, and shelf-stable products.
Gasoline: Gasoline is a highly flammable liquid fuel derived from the distillation of crude oil. It is the primary fuel used in internal combustion engines, powering a wide range of vehicles and machinery. Gasoline's properties and composition are crucial considerations in the context of Job Order Costing and Process Costing, as it represents a significant variable cost in many manufacturing and production processes.
H&R Block: H&R Block is a prominent tax preparation company that offers services to help individuals and businesses file their taxes accurately. In managerial accounting, understanding the cost structure of service-based businesses like H&R Block can provide insights into job order costing systems.
Job Cost Sheets: Job cost sheets are detailed records that track the costs associated with a specific job or project in a job order costing system. They provide a comprehensive overview of the direct materials, direct labor, and overhead costs incurred to complete a particular job or contract.
Job order costing: Job order costing is a costing method used to allocate costs to specific jobs or orders, often for products that are distinctly different from each other. It tracks direct materials, direct labor, and manufacturing overhead costs for each job individually.
Job Order Costing: Job order costing is an accounting method used to track and accumulate the costs associated with the production of specific, distinct products or services. It focuses on tracing the direct costs of materials, labor, and overhead to individual jobs or batches of products rather than to the overall production process.
Kellogg’s: Kellogg’s is a multinational food manufacturing company known for its cereals and convenience foods. It employs various costing methods to manage production costs and pricing strategies.
Manufacturing costs: Manufacturing costs are the expenses directly associated with the production of goods. They include direct materials, direct labor, and manufacturing overhead.
Marshalls: Marshalls is a retail chain that operates on a job order costing system for its custom products. It tracks costs individually for each job to accurately allocate expenses and calculate profitability.
Oil Refining: Oil refining is the process of converting crude oil into usable petroleum products, such as gasoline, diesel fuel, and various petrochemicals. It involves a series of physical and chemical processes that separate and purify the different components of crude oil to meet specific product specifications and market demands.
Overhead: Overhead refers to the indirect costs associated with operating a business that cannot be directly attributed to the production of a specific product or service. These costs are necessary for the overall functioning of the organization but are not directly related to the manufacturing or delivery of a particular item.
Overhead costs: Overhead costs are indirect expenses associated with manufacturing that cannot be directly traced to a specific job or product. These include utilities, rent, and salaries of support staff.
Period cost: Period costs are expenses that are not directly tied to production and are expensed in the period they are incurred. Examples include administrative salaries, rent, and utilities.
Pet Smart: Pet Smart is a fictional retail company specializing in pet products and services. In a managerial accounting context, it can be used to illustrate job order costing and process costing systems in practice.
Predetermined overhead rate: The predetermined overhead rate is a calculation used to allocate estimated manufacturing overhead costs to products or job orders, based on a specific activity base, such as direct labor hours or machine hours. It is determined before the period begins and helps in budgeting and costing processes.
Predetermined Overhead Rate: The predetermined overhead rate is a method used in job order costing to apply overhead costs to individual jobs or products. It is calculated by dividing the estimated total overhead costs for a period by the estimated activity base, such as direct labor hours or machine hours, for that same period. This rate is then used to apply overhead to each job based on the job's actual usage of the activity base.
Printing Services: Printing services refer to the commercial or industrial production of printed materials, such as documents, publications, and marketing collateral. These services encompass the various processes and technologies involved in transforming digital or physical content into tangible, printed outputs.
Process costing: Process costing is a method used to allocate costs in industries where production is continuous and units are indistinguishable from each other. It assigns average costs to each unit produced during a specific period.
Process Costing: Process costing is a cost accounting system used to determine the per-unit cost of a product or service when a company manufactures identical products or services in a continuous or repetitive fashion. It focuses on calculating the average cost per unit by allocating total costs across all units produced in a given period.
Production Flow: Production flow refers to the movement and transformation of materials, components, and products through the various stages of the manufacturing process. It encompasses the sequence of activities, processes, and logistics involved in converting raw materials into finished goods, ensuring efficient and timely production.
Selling and administrative costs: Selling and administrative costs are expenses that are not directly tied to the production process. These include marketing, sales, and general administrative expenses such as office supplies, salaries of non-production staff, and utilities for non-manufacturing facilities.
Sherwin Williams: Sherwin-Williams is a large American company in the paint and coating manufacturing industry. It produces a variety of products for both commercial and residential use, often requiring detailed cost accounting methods to manage production expenses effectively.
Textile Manufacturing: Textile manufacturing is the process of transforming various raw materials, such as natural or synthetic fibers, into fabrics, garments, and other textile products. It encompasses a wide range of activities, from fiber production and yarn spinning to weaving, knitting, and finishing, ultimately creating the textiles that are used in our daily lives.
Titleist: Titleist is a brand known for manufacturing golf equipment, including golf balls and clubs. In a managerial accounting context, it can serve as an example of a company that might use job order costing to track production costs for custom orders or specific product lines.
Turkey Hill: Turkey Hill is a company that manufactures and sells ice cream, frozen yogurt, and beverages. They use job order costing to track production costs for each batch of products.
Wedding Cakes: Wedding cakes are elaborately decorated cakes served at wedding receptions to celebrate the union of a couple. They are a central part of the wedding tradition, often designed to reflect the couple's style and personality.
Work-in-Process: Work-in-process (WIP) refers to the inventory of partially completed goods that are in the middle of the production process. It represents the value of the materials, labor, and overhead costs that have been incurred for products that are not yet finished and ready for sale.