Explain the similarities and differences between job order costing and process costing.
In your explanation, provide examples of when job order costing and process costing would be most appropriate.
There are various similarities and differences between the costing methods; job order costing and process costing and each concept plays a very specific role in a company’s allocation of costs. The most distinguishable is the differences of the two systems. For instance, job order costing focuses on a separate tracking of expenses that is expressly designated to one job or order (Schneider, 2017). Compared to the process costing method where the cost is assigned to a particular department. Another notable difference is that the process cost system assigns costs for a particular time period, whereas the job order system does not as it can be for any determined timeframe at any point.
While there are several differences both methods also share distinct similarities. For example, each concept has the same overall goal of defining the actual costs of product(s). Additionally, while the cost flows can also be noted as a difference the components of the cost flow are going to be the same as they both entail, inventory, labor, overhead, etc.
Dependent on what the company produces is going to determine the preferred method of costing. The job order costing method is going to be best suited for a business that produces custom made products or products that are produced for a particular customer and where each order is going to vary because of customer’s preferences.
An example would be a cabinet company where each order is going to be different and specific to the customers needs and wants therefore costs are going to vary. However, a company that produces a mass amount of the same product for a continuous or long-term basis is going to prefer the process costing system. A paper or gas company are usually going to prefer this method of costing.
Schneider, A. (2017). Managerial Accounting: Decision making for the service and manufacturing sectors(2nded.) [Electronic version]. Retrieved from https://content.ashford.edu/
Job order is a cost summary for each job and a job cost system tracks each cost separately for each job or product (Schneider, 2017). This is different then process costing which separates costs by each department then combines all costs for a product or job from each department who worked on the product to determine a unit cost (Schneider, 2017). Job order cost system is typically used for smaller products or jobs. Managers can track the costs of a product or job to ensure a reasonable quote to the customer, (Bragg, 2018). In job costing the amount of labor and materials is different between the products, such as building construction (Schneider, 2017). When constructing a building there are different materials used throughout the process, and will be different for each building built, therefore the materials and labor will change depending on the floor plan. A process costing system is usually used for larger production or jobs. This is done when the job has the same materials, and cost for production. An example for process costing is manufacturing oil. You cannot determine the exact amount of producing 1 gallon of oil because it is produced in a larger batch. However, the combined cost can be divided by the amount produced to determine a unit price (Bragg, 2018).
Bragg, S. (2018). Job order costing system. Accounting Tools. Retrieved from https://www.accountingtools.com/articles/job-order-costing-system.html
Schneider, A. (2017). Managerial Accounting: Decision making for the service and manufacturing sectors (2nd ed.) [Electronic version]. Retrieved from https://content.ashford.edu/