Job Costing and Process Costing Systems

Job Costing and Process Costing Systems

Job-order costing is used in situations where the organization offers many different products or services, such as in craft manufacturing, hospitals, and legal firms. These system is used by companies whose products, or its wide range of products, are treated as individual jobs (1985). These companies receive requests from customers that include detailed specifications regarding the product. The specifications are used as a basis for estimating the total cost of completing the job and submitting a bid or the cost to the customer.

Process costing is used where units of product are homogeneous, such as in flour milling or cement production on a continuous basis. Manufacturing costs, unlike job-order system, are accumulated in processing departments rather than individually (2002). However, the two systems also share the same characteristics. The basic purpose of the two system is to assign material, labor and overhead cost to its product, and the flow of cost through the manufacturing accounts is basically the same (Manufacturing Overhead, Raw Materials, Work in Process and Finished Goods).

To explain further process costing, let’s take a look at Laura Foods which produces garlic flavored tomato sauce. The production of the sauce requires two major processes, chopping, and mixing and canning. Now assuming that Laura foods incurred $20,000 in the mixing and canning process to mix 100,000 pints of tomato sauce, how would they be able to compute the mixing cost per pint? Laura could simply divide her incurred cost from mixing and canning to the number of pints of tomato sauce it produced ($20,000 / 100,000 = 0.20/pint).

One good example of job costing is the David, Bryan and Co. furniture manufacturing business. They received an order for 10 chairs all the way from Kansas City. The total cost of the job was $500, dividing the total cost of the job to the number of chair manufactured, we would know that the price for each chair is given at $50 ($500/10 = $50).

The differences between the two systems are more obvious than its similarity. Process system manufactures a single homogenous product that is produced on a continuous basis over a long period of time, while job-order costing may manufacture many different products in single period. This is because production in job-order costing is done individually and not departmentally. And that is why process costing key document is the department production report of costs accumulation while job-order costing key document is the individuals job-cost sheet.