Job Order and Process Costing

Job Order and Process Costing

Costing methods are used to calculate costs for a job or product. The two costing methods that will be discussed in this paper are job order costing and process costing. Both methods are defined, takes into account different production levels, provides for applications, lists the benefits of using each costing method, and finally discusses the similarities and differences.

Job order costing: “the assignment of costs to a specific manufacturing job. Employees are expected to track their time by job, and all materials are assigned to jobs. Overhead is allocated to jobs, as well.” (Bragg, 2018)

Job order costing is a method used by companies to track costs for each job completed. These jobs are unique in that each will be different and therefore, costs associated with each job will be different too. The different costs associated with each job results in a sales price that is specifically related to the client’s needs and specifications, as well as a one-off profit margin for the particular job. Example businesses that would use this costing method are airplane and yacht manufacturers, consulting and legal firms, auto mechanics, and print shops to name a few.

Job order costing involves a thorough collection of the product’s direct costs (direct material and direct labour) and indirect costs (manufacturing overhead). Indirect cost is calculated based on a cost-allocation process which is applied to each product. Each product manufactured will make use of a job-order cost sheet. The process involves identifying the product, calculating direct costs, calculating indirect costs by using the cost allocation base for each cost, summing up these costs, and finally calculating revenue. (BusinessDictionary.com, n.d.)

Benefits for using the job order costing method include:

• Profits can be calculated on individual jobs.

• Helps to monitor performance concerning cost-control, efficiency and productivity. (Ingram, 2018)

Process costing: “the accumulation of labor, material, and overhead costs across entire departments or entities, with the total production cost then being allocated to individual units.” (Bragg, 2018)

Process costing is a method used by companies to track costs over a large number of units, usually in long production runs. These units are identical or standardised, and therefore costs will be divided equally. For a business, costs can be controlled at a departmental level, and decisions can be made for entire departments concerning cost-control, efficiency, productivity and profitability. This also results in a more favourable cost for a client buying one of the products, as costs are distributed evenly over a large number of products. Example businesses will include food production, chemical manufacturers, and auto-assembly plants.

Similar to job order costing, process costing involves collecting the product’s direct (direct material and direct labour) and indirect costs (manufacturing overhead). The two methods differ when it comes to calculating the indirect