After that, the mug is sent to the coloring department, where the mug is painted the correct color. Next, the colored mug is sent to the lid department, where plastic lids are created and placed on the mug. Finally, the mug gets sent to the packaging department, where the completed mug gets packaged. Since each coffee mug goes through the same manufacturing process, the firm will use a process costing system. Process costing is used when products are produced on a continuous basis and are indistinguishable from each other.
- However, instead of assigning product costs to individual jobs (shown on a job cost sheet), process costing assigns these costs to departments (shown on a departmental production cost report).
- When a company mass produces parts but allows customization on the final product, both systems are used; this is common in auto manufacturing.
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- Job costing is more likely to be used for billings to customers, since it details the exact costs consumed by projects commissioned by customers.
- Heterogeneous products and services are products and services that have different characteristics than other products and services the firm sells.
- Process costing can be calculated on either a first-in, first-out (FIFO) or weighted average basis.
Job order costing provides more accurate cost figures for heterogeneous products and services. Heterogeneous products and services are products and services that have different characteristics than other products and services the firm sells. In other words, the product or service is customized or tailored to fit that customer’s specific needs.
Equivalent Units
The process of production does not change because of the costing method. Expanding on the previous example, the prefabricated staircase manufacturer measures a home and sends the measurements to the production worker. The production worker writes down the time he starts building the staircase on the job order cost sheet. Next, the production worker gathers and cuts all of the materials needed to length.
The OpenStax name, OpenStax logo, OpenStax book covers, OpenStax CNX name, and OpenStax CNX logo
are not subject to the Creative Commons license and may not be reproduced without the prior and express written
consent of Rice University.
Similarities between job order costing and process costing:
Accountants compute the cost per unit by first accumulating costs for the entire period (usually a month) for each process or department. Second, they divide the accumulated costs by the number of units produced (tons, pounds, gallons, or feet) in that process or department. A process cost system (process costing) accumulates costs incurred to produce a product according to the processes or departments a product goes through on its way to completion.
- This number will be multiplied by the number of equivalent units to solve for the cost of equivalent units in each department.
- Many businesses produce large quantities of a single product or similar products.
- Period costs are expensed during the period in which they are incurred; this allows a company to apply the administrative and other expenses shown on the income statement to the same period in which the company earns income.
- Regardless of the costing system used, manufacturing costs consist of direct material, direct labor, and manufacturing overhead.
Job costing is used for very small production runs, and process costing is used for large production runs. Process costing can also accommodate increasingly complex business scenarios. While making drumsticks may sound simple, an immense amount of technology is involved. Rock City Percussion makes 8,000 hickory sticks per day, four days each week. The sticks made of maple and birch are manufactured on the fifth day of the week.
Accounts Used to Track Product Costing
Job order costing is often a more complex system and is appropriate when the level of detail is necessary, as discussed in Job Order Costing. Examples of products manufactured using the job order costing method include tax returns or audits conducted by a public accounting firm, custom furniture, or, in a comprehensive example, semitrucks. At the Peterbilt factory in Denton, Texas, the company can build over 100,000 unique versions of their semitrucks without making the same truck twice. Often, process costing makes sense if the individual costs or values of each unit are not significant.
In the case of a not-for-profit company, the same process could be used to determine the average costs incurred by a department that performs interviews. The department’s costs would be allocated based on the number of cases processed. For example, assume a not-for-profit pet adoption organization has an annual budget of $180,000 and typically matches 900 shelter animals with new owners each year. With processing, it is difficult to establish how much of each material, and exactly how much time is in each unit of finished product.
Size of Job
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. A job costing system is used by companies that produce unique products or jobs. Much more record keeping is required for job costing, since time and materials must be charged to specific jobs. Process costing aggregates costs, and so requires less record keeping. Job costing is used for unique products, and process costing is used for standardized products. Many businesses produce large quantities of a single product or similar products.
The sticks are dried, and then sent to the packaging department, where the sticks are embossed with the Rock City Percussion logo, inspected, paired, packaged, and shipped to retail outlets such as Guitar Center. The difference between process costing and job order costing relates to how the costs are assigned to the products. 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 standard stairs are all identical and follow the same process. The company decides to use job order costing for all custom stairs. Understanding the company’s organization is an important first step in any costing system.
