7.2: Job Order Costing vs Process Costing
Learning Outcomes
- Compare and contrast job order and process costing
You have just been hired as an accountant at a local manufacturing company. They are a small start-up and are unsure how to enter costs into their accounting system. Having just purchased Quickbooks software, it is time to decide how they get it set up to work most effectively for their needs. Currently, the company makes one product, the Ultimate Planner. The Ultimate Planner is a printed planner designed to make every small business owner’s life just a bit easier. Sales have been great, but they are now in a position to really get down to ensure that they are making money on each planner they sell.
You sit down and take a look at the two possible costing methods; Job order costing and process costing. Let’s first compare the two:
| Job Order Costing | Process Costing |
|---|---|
|
|
Let’s think about our product. We produce, one thing on a continuous basis : the planner. If you look at the two types of costing, which one makes more sense?
Both of the systems are alike in that they are designed to accumulate costs such as materials, labor and manufacturing overhead, and assign them to a product. We will also be using the same accounts, regardless of which costing method we use. So remember from our previous unit, we will use:
- Manufacturing overhead
- Raw materials
- Work in process (WIP)
- Finished goods
The costs will also flow through the system in a similar way. But what are the differences?
In the process costing, we are making one product either all the time or for an extended period of time. So in the case of our Ultimate Planner, since we make one product, it seems to make more sense to use process costing, right?
What would happen, if down the line, they decide to do special custom planners for different customers? For example, an order comes in to make a planner in a certain color for a large employer to give to all employees. This may create a “job-order costing” situation, rather than a “process costing” situation. But for right now, they are only creating one product in their facility and they are producing it all the time—let’s move forward with process costing.
Practice Questions