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The main objective of manufacturing firms is to make profit. The profit on each product sold is the difference between the selling price of the product and the total cost of making the product. Cost therefore plays an important role in the product design process. To calculate the cost that incurred on the product we use different Costing Techniques. Costing is not an easy task because in the process of manufacturing a product many indirect materials and labour are used. To identify these costs we use different costing techniques. Here we are going to discuss two methods of costing Job Costing and Process Costing.
Job Costing is to calculate the costs involved of a business in manufacturing goods. These costs are recorded in ledger accounts throughout the year and are then shown in the final trial balance before the preparing of the manufacturing statement.
In a job costing system, costs are accumulated by job. Direct material and direct labor are easily tracked on a product. In job costing we keep tracking these costs at their original value till the job is completed. Overhead is applied after the job is done. It is applied either by using a rate based on direct labor hours or by using an Activity Based Costing (ABC)cost driver. In either case, once overhead is added, the total cost for the job can be determined. Upon completion, the costs are transferred out of Work in Process to Finished Goods (Cost of Goods Sold for service industries)
shoe manufacturing-" requires different specification
garment manufacturing-" orders differs significantly
vehicle repair shops-" each repairs requires different parts replacement and labor hours
Process costing is a method that traces and accumulates direct costs, and allocates indirect costs of a manufacturing process. Costs are assigned to products, usually in a large batch, which might include an entire month's production. At last, costs have to be allocated to individual units of product. It assigns average costs to each unit, and is the opposite extreme of Job costing which attempts to measure individual costs of production of each unit.
Process costing is a type of operation costing which is used to ascertain the cost of a product at each process or stage of manufacture. It can be defined costing as "The costing method applicable where goods or services result from a sequence of continuous or repetitive operations or processes. Costs are averaged over the units produced during the period". Process costing is suitable for industries producing homogeneous products and where production is a continuous flow. A process can be referred to as the sub-unit of an organization specifically defined for cost collection purpose.
Automobile assembly line-all cars coming out are identical
Electronic assembly line where all products is identical
Biscuit manufacturing though has more than one product line, each line is a separate, continuous process producing identical products.
The difference between job order costing and process costing arise from two various reasons. The first is that the units which flow in process costing is almost continuous, and the second is that these units are identical to each other. Under process costing it's a wastage of time to try to identify materials, labor, and overhead costs with a particular order from a customer ( as we do with job order costing ), since each order is just one of many that are filled from a continuous flow of virtually identical units from the production line. Under process costing, we accumulate costs by department rather than by order, assign these costs uniformly to all units that pass through the department during a period.
A further difference between the two costing systems is that the job cost sheet is not used in process costing, since the main point ofÂ a process costing is on departments. Instead of using job cost sheet a production report is prepared for each department in which work is done on products. The production report serves several functions. It provides a summary of number of units moving through a department during a period, and it also provides a computation of unit costs. In addition it shows what costs were charged to the department and what disposition was made on these costs. The department production report is a key document in a process costing system.
Job Order Costing
Jobs are different in nature. Every job has different production requirements and many jobs can be processed at the same time.
Costs are occured by every individual different job.
Job cost sheet is the document, which shows from where the costs have come on the job.
Unit costs are computed by job on the job cost sheet.
A solo product is produced regularly or for a long period of time. All units of product are same.
Costs are accumulated on the product by all the departments.
The department production report is the document, which shows from which department costs have come and how much.
Unit costs are calculated by department on the department production report.
Both costing techniques have their own advantages and disadvantages. In job costing, costs are accumulated by job whereas in process costing it is done by a process. Job costing is fundamental to managerial accounting. Process costing is used when products are more homogeneous, whereas job costing can be done on heterogeneous products as well.