5.1 Compare and Contrast Job Order Costing and Process Costing
3 min read•june 18, 2024
Manufacturing companies use different costing methods to track production expenses. suits custom products, tracing costs to specific jobs. fits continuous production, averaging costs over many similar units. The choice depends on product homogeneity and cost traceability.
Both methods accumulate costs differently. uses for direct costs and allocates overhead. averages costs by department over a period. Understanding and allocation is crucial for accurate product costing in either system.
Differences Between Job Order and Process Costing
Job order vs process costing systems
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- Job order costing system tracks costs for each unique job or batch
- Ideal for custom products (custom furniture, construction projects, printing jobs)
- Costs directly traced to specific jobs using job cost sheets
- Process costing system averages costs over large number of homogeneous units
- Suitable for continuous production of similar products (oil refining, chemical production, food processing)
- Costs accumulated by department or process for a specific period
- Choosing between job order and process costing depends on product homogeneity, production continuity, and cost traceability to specific products or jobs ()
Cost tracking in costing methods
- Job order costing traces and labor to specific jobs using job cost sheets
- Allocates overhead costs to jobs based on
- Each job has unique costs
- Process costing accumulates costs by department or process for a specific period
- Averages costs over all units produced in a department during the period
- Costs flow from one department to next as units move through production process (cost flows)
- Job order costing assigns costs to specific jobs based on actual resource consumption
- Process costing assigns costs to products based on average for each department
Cost Accumulation and Allocation
- Both job order and process costing are that use different
- are used to collect and organize costs before allocation
- are factors that cause changes in cost and are used to allocate costs to products or services
- Understanding cost flows is crucial for accurate in both systems
Calculating Costs in Process Costing
Equivalent units for process costing
- of production measure work done during a period, expressed in fully completed units
- Calculated separately for materials and conversion costs (labor and overhead)
- Calculate for materials: (Units completed + Units in ending WIP inventory) × Percentage of completion for materials
- Calculate equivalent units for conversion costs: (Units completed + Units in ending WIP inventory) × Percentage of completion for conversion costs
- Determine per-unit costs: Total costs for the period (materials, labor, overhead) ÷ Equivalent units of production
- Calculate separately for materials and conversion costs
- Assign costs to completed units: Per-unit cost × Number of units completed
- Assign costs to WIP inventory: Per-unit cost × Equivalent units in ending WIP inventory
Key Terms to Review (38)
Batch Costing: Batch costing is a method of cost accounting where costs are accumulated and assigned to distinct batches or groups of similar products, rather than to individual units. This approach is commonly used in manufacturing environments where products are produced in discrete batches rather than as a continuous flow.
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 Accumulation Methods: Cost accumulation methods refer to the techniques used to collect and organize costs within an organization. These methods are crucial in the context of Job Order Costing and Process Costing, as they determine how costs are assigned and tracked throughout the production process.
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 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 Flows: Cost flows refer to the movement of costs through the different inventory accounts in an accounting system. It is a fundamental concept in cost accounting that describes how the costs of materials, labor, and overhead are tracked and allocated to products or services as they move through the production process.
Cost Objects: Cost objects are the items or activities for which costs are measured and assigned. They serve as the focal point for the accumulation and assignment of costs within an organization, enabling managers to understand the costs associated with specific products, services, or operations.
Cost per Unit: Cost per unit is the total cost of producing a single unit of a product or service. It is a crucial metric in both job order costing and process costing systems, as it helps businesses understand the true cost of their products and make informed pricing decisions.
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.
Costs of goods sold: Costs of Goods Sold (COGS) represents the direct costs attributable to the production of goods sold by a company. This includes the cost of materials and labor directly used to create the product.
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.
Equivalent units: Equivalent units measure the work done during a period, expressed in fully completed units. This concept helps allocate costs accurately in process costing systems.
Equivalent Units: Equivalent units refer to the measure of the work completed on partially finished units in a process costing system. It represents the number of fully completed units that could have been produced from the total effort expended on both finished and partially finished units 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.
Finished goods inventory: Finished goods inventory consists of products that have completed the manufacturing process but have not yet been sold to customers. These goods are ready for sale and are accounted for as an asset on the balance sheet.
Finished Goods Inventory: Finished goods inventory refers to the completed products that are ready for sale to customers in a manufacturing organization. It represents the final stage of the production process, where the manufactured goods are held in storage awaiting distribution and sale.
Heterogeneous Products: Heterogeneous products refer to a collection of items or goods that are distinctly different from one another in terms of their physical characteristics, functions, or production requirements. These products do not share a common set of manufacturing processes or resource consumption patterns, unlike homogeneous products.
Homogeneous Products: Homogeneous products refer to goods or services that are essentially identical or undifferentiated in the eyes of the consumer. These products lack unique features, characteristics, or branding that would distinguish one from another, making them interchangeable within a given market.
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.
Manufacturing costs: Manufacturing costs are the expenses directly associated with the production of goods. They include direct materials, direct labor, and manufacturing overhead.
Manufacturing overhead: Manufacturing overhead includes all indirect costs associated with the production process, such as utilities, maintenance, and factory supplies. It does not include direct materials or direct labor costs.
Manufacturing Overhead: Manufacturing overhead refers to the indirect costs associated with the production of goods in a manufacturing organization. These are the costs that cannot be directly traced to a specific product but are necessary for the overall manufacturing process. Manufacturing overhead encompasses a wide range of expenses, including indirect materials, indirect labor, and other factory-related costs.
Period costs: Period costs are all costs that are not included in product costs and are expensed in the period they are incurred. These typically include selling, general, and administrative expenses.
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.
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.
Product Costing Systems: Product costing systems are the methods used by organizations to determine the total cost of producing a specific product or service. These systems are crucial for decision-making, pricing, and financial reporting purposes. They involve the allocation of direct and indirect costs to individual products or services.
Production cost report: A production cost report summarizes the total costs incurred by a processing department and calculates the cost per unit for products during a specific period. It is essential for managing and controlling production costs in process costing systems.
Production Cost Report: A production cost report is a financial statement that summarizes the total cost of producing goods or services within a specific time period. It provides a detailed breakdown of the various cost components involved in the production process, including direct materials, direct labor, and manufacturing overhead.
Selling and administrative (S&A) expenses: Selling and administrative (S&A) expenses are costs not directly tied to the production of goods or services. They include expenses such as salaries, advertising, and office supplies.
Work in process inventory: Work in process (WIP) inventory consists of partially finished goods that are still in the production process. These items have incurred some costs but are not yet complete and ready for sale.
Work in Process Inventory: Work in Process Inventory, or WIP, refers to the partially completed goods that are in the production stage of a manufacturing process. It represents the cost of raw materials, labor, and overhead that have been incurred for products that are not yet finished and ready for sale.