What is the main difference between job costing and process costing provide one example for each costing method?

A comparative study of process and job costing will help to understand both systems more effectively. A summary of their differences is given below.

Table of Contents Show

What are the similarities between process costing and job costing?
What is the formula to calculate cost per unit in process costing?
How many different kinds of costs are there?
What type of costs is inventoriable?
What Is Job Costing?
Pros of Job Costing
Cons of Job Costing
What Is Process Costing?
Pros of Process Costing
Cons of Process Costing
Differences Between Job Costing and Process Costing
Key Takeaways


1. Costs are calculated process-wise and per unit cost is the average cost (ascertained by dividing the total cost of the process by the number of units produced)	1. Costs are separately calculated for each job, which is a cost unit
2. Production of standardized and identical products is undertaken	2. Production of non-standardized and unidentical items is undertaken according to customer instructions and specifications
3. Costs are calculated at the end of a particular period	3. Costs are ascertained on the completion of a job
4. As a series of processes is involved, the cost of one process is transferred onto the other process	4. As the job as a whole is regarded as a single unit, costs are job-specific
5. The nature of production is continuous, where there is usually work-in-progress in the beginning as well as at the end	5. The work-in-progress may or may not occur at the beginning or end of the accounting period
6. Due to continuous and uninterrupted production, cost control is comparatively easy	6. Cost control becomes difficult due to the intermittent nature of production
7. Production is taken to stores	7. Production is undertaken against orders from the customers

Process Costing calculates costs at a particular stage of production whereas job cost accounts for each completed work order.

What are the similarities between process costing and job costing?

Both methods follow the same convention of charging direct material, direct labour and factory overhead to production accounts (common pool).

What is the formula to calculate cost per unit in process costing?

Total Standard Costs ÷ Equivalent Units = Equivalent Cost Per Unit

How many different kinds of costs are there?

There are 5 kinds of costs, namely: product costs, period costs, inventoriable costs, non-inventory holding costs and reported costs.

What type of costs is inventoriable?

Product or period costs can be inventoriable under Process Costing.

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.

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8 Min. Read

December 7, 2021

As an organization, your primary objective is to generate profits; returns for shareholders. However, it’s not just about that. The profits you earn are intrinsically related to sales volumes and revenue. In fact, you may have high sales volumes and revenues but very little or no profit.

How’s that possible?

Well, it comes down to your costs. A key element of becoming profitable and scaling is effective cost management. It helps in different ways that ultimately translate to a higher profit margin.

When it comes to measuring the cost of products, you can either use job costing or process costing. These are types of accounting systems. Companies use them to track all the costs they’ll incur when delivering a service or producing products. The accounting system you should use depends on the nature of your business.

Read on to learn about these two cost accounting techniques and how they compare.

Here’s What We’ll Cover:

What Is Job Costing?

What Is Process Costing?

Differences Between Job Costing and Process Costing

Key Takeaways

What Is Job Costing?

Job costing is also known as job order costing. It’s ideal for the service industries where institutions work on a project basis, as the total cost varies with each job. Often, such professional services involve the need to provide customers with accurate estimates before the work begins. These include freelancers, movers, mechanics, and plumbers.

Some of the features and factors that affect direct costs with job order costing include:

The unique needs of the job
Specific requirements or needs that the client may have
Variances in how the work progresses across different phases

Assume that two people with similar kitchens hire a construction company to perform a similar renovation. The project manager will begin by estimating the cost of individual elements of the project. These include:

Direct material cost
Direct Labour costs
Equipment costs
subcontractors

They’ll tally the estimates for each factor to get the exact cost for the whole project.

However, despite all the similarities between individual projects, the costs will vary. This is because other variances will arise during the project and can only be accounted for at that time. For example, they may find that the entire plumbing system for one house is damaged. This means they may have to replace it, further increasing costs.

Given the nature of such projects, job costing systems are ideal. They help the contractor capture the actual cost of each job. In turn, this also allows them to have an accurate expectation of profits.

For effective job costing, there are different costs that you should account for. They include:

Direct labour costs- Includes the cost of employing people but not management and administrative costs
Direct material costs- Inclusive of all the direct materials necessary for a particular project

Along with the direct labour expenses and material costs, job costing also accounts for overhead costs. These include indirect expenses you incur for the job. They include:

Cost of management and administrative work
Cost of travel to and from the job site and time taken
Cost of tools and equipment such as nail guns, ladders, etc.
Material costs across projects
Insurance costs
Marketing costs
Unexpected costs

Compared to direct labour and material costs, figuring out the overhead costs can be challenging.

Pros of Job Costing

For organizations that use job costing, there are several benefits to be enjoyed. They include:

Easier to make comparisons between the cost and profit- With such jobs, you can create a great estimate for how much you’ll spend. Comparing it with how much you’ll earn allows you to determine the profit.
Gives you pricing flexibility- From the word go, you’ll have a clear picture of the costs, income, and profits. This allows you to determine the appropriate sale price and know the discounts you can offer without compromising profits.
Enables you to measure productivity- If you know the specifics for the project, you can determine how long your team should take to complete it. If they take longer than that, you will know that something needs to be addressed before the next job. Also, it’ll help you realize the variance in productivity among employees.
It makes budgeting easy- You’ll have a rough idea about the various costs you’ll incur for the type of jobs you handle. As a result, creating a company budget for each period is easier.

Cons of Job Costing

Regardless of how beneficial job costing is, it also has some drawbacks. These include:

It can be labour intensive
It does not help with controlling costs
Requires a lot of paperwork and documentation
Some guesswork is involved

What Is Process Costing?

When dealing with near identical products and services, process costing is the ideal cost accounting method. It’s especially effective for the large-scale production of homogenous products.

As the name suggests, you’ll account for different processes. These are the stages at which raw materials are converted into another identifiable form. As such, you’ll have to divide the plant-based on various processes. They may either be performed parallelly, sequentially or selectively.

Therefore, each process will require a process account. With this, the output of an individual process becomes the input of the next one. This goes on until you attain the output of the final process, which will be the total cost of the product.

This form of cost accounting is suitable for large-scale production, companies that produce different products, or where there are various levels of production. These include companies that produce soap, paper, steel, paints, and cold drinks.

Pros of Process Costing

Process costing offers organizations benefits such as:

Easy to use- Since there’s standardized products and processes, so too are the costs, making process costing systems easy to use.
Flexibility- With process costing, companies enjoy flexibility in the production process. Should there be a need to make adjustments, you can simply add or remove a process. In doing so, you can reduce production costs and increase profitability.

Cons of Process Costing

As with job costing, process costing also has some disadvantages. These include:

Cost errors- One of the drawbacks of cost accounting is that there are multiple ways costing errors may occur. Since it does not use direct allocation costing, it’s possible for non-production costs to be included. Also, the products may be under-costed if accounting teams do not account for all production costs. If this happens, your profits will be lower.
Equivalent units- Equivalent units are the unfinished goods that remain at the end of an accounting period. These must be accounted for in cost accounting and are often an estimate or guess. Any inaccuracies translate to inventory management challenges and determining the number of finished products available for sale.

Differences Between Job Costing and Process Costing

As you now know, job costing and process costing use varying approaches to calculating the cost of individual products and services. Therefore, they have differences such as:

Assignment- In process costing, you first determine the cost of each process, add them up and calculate based on the number of units. On the other hand, job costing calculations are done based on each job.
Production- Production is standardized with process costing, while for job costing it’s customized.
Cost transfer- While you can transfer some product costs from one process to another in process costing, that cannot be done with different jobs in job costing.
Reduction in cost- Job costing does not offer as many scope of cost reduction as process costing.
Individuality- Since each job is different, you can produce custom products in job costing. However, there is no individuality with process costing as it involves the production of identical units.
Losses- It’s possible to separate losses with process costing, but it is not possible with job costing.
Size of job- Process costing is ideal for large scale production, while job costing is best when the production units are small.
Work in progress- At the beginning and end of each period, there’s always work in progress (WIP) with process costing. With job costing, there may or may not be WIP.
Recordkeeping- With job costing, recordkeeping is time-consuming and tedious. However, it’s more streamlined and efficient with process costing.
Industry- Process costing is a suitable option for industries where products are standardized and produced in mass. For sectors where consumers have room to customize products and services to their liking, job cost is suitable.

Key Takeaways

When it comes to job costing and process costing, it’s not about which is the best. Instead, it is about the one that suits your construction company better. The most important thing is tracking your product costs accurately with either one. While you can do so manually, it’s best to have a solution you can trust.

FreshBooks is a software solution that provides a host of accounting solutions. These include cost tracking, invoicing, time tracking, etc. Try it for free today to find out more about how it can help grow your company.

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