LO 5 1 Compare and Contrast Job Order Costing and Process Costing Managerial Accounting adapted by SPSCC

In a factory that produces large quantities of the same style t-shirts, each stage—such as weaving, cutting, assembly, and printing—generates costs that accumulate in that production process. These costs include materials like cotton, worker salaries, and machine maintenance costs. Raw materials are stored in the materials storeroom and delivered to the appropriate production department—cutting, painting, or assembly/finishing.

Differences Between Job Costing and Process Costing

One factor that can complicate the choice between job order costing and process costing is the growth of automation in the production process, which typically is accompanied by a reduction in direct labor. The cost of the increase in equipment (typically reflected as a depreciation expense) is allocated to overhead, while the decreased need for labor usually reduces the direct labor cost. Because of these issues, some companies choose a hybrid system, using process costing to account for mass producing a part and using job order costing to account for assembling some of those individual parts into a custom product.

• In addition to specific price and cost, these are other important considerations.
• This methodology focuses on accumulating expenses in each link of the production itinerary, regardless of whether they are inputs, labor or collateral costs, and then dividing them by the total number of units manufactured.
• We accelerate digital transformation by aligning strategy, processes and technology.
• Sometimes, after inspection, the product needs to be reworked and additional pieces are added.
• Job costing, on the other hand, requires business owners to manage multiple (sometimes hundreds or more) individual projects.

Some manufacturers make unique products, such as aircraft, made-to-order suits, or custom teddy bears. Others mass-produce large numbers of similar or identical items, such as soft drinks, sheets of paper, and boxes of cereal. To mass-produce products at a minimal cost, assembly lines move materials and partially finished goods from one station or department to the next until they get completed into finished goods.

Job order costing vs process costing

Its cost data are collected via a job order cost system, which is designed to allow for individualized products or services. A third example is found in the chemical industry, such as the manufacture of liquid detergents. In this operation, the process is continuous, and each batch produced is homogeneous in composition and characteristics.

• The logic is that a business incurs costs based on activities like the number of labor hours worked, the total units produced, or the total miles driven.
• This will require the use of the equivalent unit computation, and management selects the method (weighted average or FIFO) that best fits their information system.
• In contrast, a process costing system does not need to maintain the cost for individual jobs because the jobs use a continual system of production, and the items are typically not significantly unique but instead are basically equivalent.
• Although these companies share a common location, which suggests similar rental costs, all the other costs vary significantly.
• Many direct material costs, as the wood in the frame, are easy to identify as direct costs because the material is identifiable in the final product.

The Financial Implications of Your Costing Method Choice

They would then produce the components of compare and contrast job order and process costing systems another product (e.g. dining room sets) in a new batch. (Some university food service companies prepare meals this way.) Companies such as these use job costing methods to accumulate the cost of each batch. Although job order costing measures the cost of each individual job, process costing measures the cost of work actually done on WIP during a period. Overhead costs are the most difficult to assign to products, and many businesses struggle to analyze these costs. Overhead costs cannot be directly traced to products or services, which makes them harder to track and manage.

Basic Managerial Accounting Terms Used in Job Order Costing and Process Costing

For example, some items that are classified as overhead, such as plant insurance, are period costs but are classified as overhead and are attached to the items produced as product costs. While still in production, the work in process units are moved from one department to the next until they are completed, so the work in process inventory includes all of the units in the shaping and packaging departments. When the units are completed, they are transferred to finished goods inventory and become costs of goods sold when the product is sold. Second, some companies, like furniture manufacturers, produce batches of products. They produce all of the components of a single product (e.g. coffee tables) in one batch.

LO 5.1 Compare and Contrast Job Order Costing and Process Costing

In either costing system, the ability to obtain and analyze cost data is needed. This results in the costing system selected being the one that best matches the manufacturing process. The textile industry can also serve as an example, specifically in the production of basic t-shirts.

It would be difficult, and not cost effective, to track the cost of each individual clothing item; rather, it is more efficient to track the costs in each phase of the clothing-making process. Levi’s can then accumulate the costs of the phases of production to determine the total cost of production for a batch and allocate those costs over the number of pairs of jeans made. Levi’s had over \(\$4.9\) billion in revenue in 2017 generated from the many different styles and brands of clothing items they produce and sell. Often, process costing makes sense if the individual costs or values of each unit are not significant. For example, it would not be cost-effective for a restaurant to make each cup of iced tea separately or to track the direct material and direct labor used to make each eight-ounce glass of iced tea served to a customer. In this scenario, job order costing is a less efficient accounting method because it costs more to track the costs per eight ounces of iced tea than the cost of a batch of tea.

Selling and Administrative Costs

Without adequate control over these costs, companies risk losing competitiveness, making uninformed decisions, or even devaluing their products. This is precisely where job order costing and process costing systems come into play, offering structured methodologies to understand and manage production costs efficiently. Both process costing and job order costing maintain the costs of direct material, direct labor, and manufacturing overhead. In a process cost system, costs are maintained by each department, and the method for determining the cost per individual unit is different than in a job order costing system. Rock City Percussion uses a process cost system because the drumsticks are produced in batches, and it is not economically feasible to trace the direct labor or direct material, like hickory, to a specific drumstick. Therefore, the costs are maintained by each department, rather than by job, as they are in job order costing.