In the world of accounting, you may hear the terms “process costing” or “job order costing.” Both of these are cost accounting systems that are designed to help a business track all costs they have to pay to produce a product or deliver a service. While they work relatively the same, these terms cannot be used interchangeably. In fact, there are key differences between the two, and which one you use depends on what type of business you’re running.
In this article, we will show you the key differences between process costing and job order costing.
Job order costing refers to calculations that are made by companies that complete work on a project-based system. This kind of work is done by tradesmen such as plumbers, mechanics, movers, and similar tradespeople. These industries operate under the knowledge that no job is ever the same and each job has its own criteria for success.
These types of jobs usually require some sort of estimate for a customer or client. For example, a mechanic would calculate their estimate by determining labor costs, equipment use, parts needed, and anything else needed to complete the job. Additionally, they would need to calculate their profit margin to ensure their garage is earning enough money to sustain their operations.
When job order costing, all costs are related to specific jobs and they often differ from one another.
Process costing is similarly used to track production, however, the key difference is that instead of tracking unique jobs like job order costing, process costing helps calculate total costs for similar units after a large production process. Industries that may use process costing include food production, textiles, and paint manufacturing.
When using a system of process costing, companies determine the final cost of manufacturing a product by tracking how much it costs at each step of the production process. After, they then divide that cost by how many products the process produced.
Process costing usually includes both direct and indirect costs associated with the production process. Some examples of direct costs include raw materials for the product or compensation for the machine operator. Indirect costs include things like maintenance for the machines being used in production and compensation for other employees that do not have a direct hand in the production process.
It is essential for manufacturers to understand both methods of costing in order to support things they need to know such as production costs, materials and labor costs, or how much to charge for their product.
While both do relatively the same thing for a company, when you will use one over the other depends on:
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