Key Differences between Job Costing and Process Costing
by Job costing is a specialized costing method used to track and accumulate production costs for distinct, custom-made products, services, or batches. Unlike mass production systems, it assigns direct materials, direct labor, and manufacturing overhead to specific identifiable jobs or customer orders. Each job is treated as a separate cost unit, allowing businesses to precisely determine its total cost and profitability. This method relies heavily on the Job Cost Sheet, a document that records all costs incurred for that particular job. Industries like construction, shipbuilding, custom furniture, legal services, and film production extensively use job costing. Since no two jobs are identical, this system enables accurate pricing, effective cost control, and detailed profitability analysis for each unique undertaking.
Characteristics of Job Costing:
1. Separate Identification of Jobs
Under job costing, every job or order is given a separate identification number. This helps distinguish one job from another and ensures that all costs are recorded against the correct job. Materials, labour, expenses, and overheads relating to a particular job are collected using its identification number. This system is especially useful when different customers place orders with different specifications. Separate identification also makes cost comparison and profitability analysis easier. Therefore, assigning a unique number to each job ensures systematic recording, accurate cost accumulation, and effective cost control for individual jobs.
2. Individual Cost Unit
In job costing, an individual job, order, or contract is treated as the basic cost unit. Costs are collected separately for each job instead of combining them for all production. The cost unit may represent a specific customer order, repair work, printing assignment, or construction activity. Since each job may have different requirements, its cost is determined independently. This helps management know exactly how much has been spent on completing a particular job. Thus, treating each job as a separate cost unit is an important characteristic of job costing.
3. Preparation of Job Cost Sheet
A Job Cost Sheet is prepared separately for every job undertaken by the organisation. It records the direct materials, direct labour, direct expenses, and allocated overheads related to the job. The sheet provides a complete record of costs incurred during the production process. It helps management calculate the total cost and cost per unit of the job. The Job Cost Sheet can also be used for preparing quotations and evaluating profitability. Therefore, maintaining separate Job Cost Sheets ensures accurate cost recording and effective analysis of individual jobs.
4. Direct Costs are Charged Directly
In job costing, direct materials, direct labour, and direct expenses are charged directly to the specific job for which they are incurred. Materials issued for a particular job are recorded through material requisition documents, while labour time is recorded through time sheets or job cards. Direct expenses are also charged to the relevant job. This ensures that the actual resources consumed by each job are properly measured. Direct charging improves the accuracy of cost determination and helps management identify the specific expenditure associated with every individual job.
5. Overheads are Absorbed
Overheads are indirect costs that cannot be directly identified with a particular job. Therefore, they are allocated or absorbed using a suitable basis such as labour hours, machine hours, direct wages, or material cost. Proper overhead absorption ensures that each job bears a reasonable share of indirect production expenses. It also helps determine the complete cost of a job rather than considering only direct costs. Accurate overhead absorption is necessary for correct pricing and profitability analysis. Thus, systematic allocation of overheads is an important feature of the job costing system.
6. Production According to Customer Requirements
Job costing is generally used where products or services are produced according to specific customer requirements. Each customer may require different designs, quantities, materials, sizes, or quality standards. Therefore, the production process varies from one job to another. Examples include customised furniture, printing orders, repair services, interior decoration, and specialised machinery. Since each job is different, separate cost records are necessary. This characteristic distinguishes job costing from methods used for continuous production of standard products. Thus, customised production is a major feature of job costing.
7. Costs are Accumulated Job Wise
All costs relating to a particular job are accumulated separately under job costing. Direct materials, direct labour, direct expenses, and absorbed overheads are recorded against the relevant job number. This enables management to determine the total cost incurred on each job. Job wise cost accumulation also helps compare the performance and profitability of different jobs. If a job shows excessive costs, management can investigate the reasons and take corrective action. Therefore, separate accumulation of costs ensures accurate costing, cost control, and effective performance evaluation.
8. Jobs May Differ in Nature
Jobs undertaken under this costing system may differ significantly in their size, design, specifications, materials, labour requirements, and production time. One customer order may require completely different resources from another order. As a result, the cost of each job is calculated independently. This flexibility makes job costing suitable for industries producing customised or specialised goods and services. The method does not assume that every job will have the same cost. Therefore, variation between individual jobs is an important characteristic that makes separate cost accumulation and analysis necessary.
9. Profitability is Determined Job Wise
Job costing enables management to determine the profit or loss of each individual job. After completing a job, its total cost is compared with the selling price or revenue earned from the customer. This helps identify profitable and unprofitable orders. Management can analyse the reasons for differences in profitability, such as material consumption, labour efficiency, overheads, or pricing. Such information is useful for future quotations and customer decisions. Therefore, job wise profitability analysis helps management improve pricing decisions, cost control, and overall business performance.
10. Suitable for Small Production Runs
Job costing is generally suitable for small quantity or limited production runs where products are made according to specific orders. Production does not usually continue in a uniform and uninterrupted manner. Instead, work begins and progresses according to individual customer requirements. Each job may require different materials, labour skills, machinery, and production time. Separate cost records are therefore maintained for every order. Industries such as printing, repair workshops, specialised engineering, and customised furniture commonly use this method. Thus, suitability for small and specialised production runs is a key characteristic of job costing.
Process Costing
Process Costing is a method of cost accounting used where production passes through a series of continuous processes and identical or homogeneous products are produced in large quantities. Under this method, costs are accumulated separately for each process or production stage rather than for individual units or jobs. The costs of materials, labour, and overheads are recorded for each process. The total process cost is then divided by the number of units produced to determine the cost per unit. Process costing is commonly used in industries such as chemicals, textiles, cement, sugar, paper, oil refining, and food processing, where production is continuous and products are generally uniform.
Characteristics of Process Costing:
1. Continuous Production
Process costing is mainly used where production takes place on a continuous basis. The manufacturing process operates for long periods and may continue without interruption. Products pass through a number of processes or departments before reaching the finished stage. Industries such as cement, sugar, chemicals, paper, and oil refining commonly use this method. Since production is continuous, individual units are not normally treated as separate cost units. Instead, costs are accumulated for each process. Thus, continuous and uninterrupted production is one of the most important characteristics of process costing.
2. Homogeneous Products
Process costing is generally applied where a business produces identical or homogeneous products in large quantities. The units produced usually have similar characteristics, specifications, and production requirements. Since individual units are substantially alike, it is not necessary to calculate the cost of each unit separately. Instead, the total cost incurred in a process is distributed over the units produced. This makes the calculation of average cost convenient. Industries producing products such as sugar, cement, chemicals, and beverages commonly use process costing because their output is largely uniform.
3. Production Divided into Processes
Under process costing, production is divided into different processes or stages. Each process performs a specific manufacturing activity and may transfer its output to the next process. A separate account is generally maintained for each process to record the costs incurred. The output of one process becomes the input of the following process until the final product is completed. This arrangement helps management identify the cost incurred at each production stage. Therefore, division of production into clearly identifiable processes is a fundamental characteristic of process costing.
4. Costs Accumulated Process Wise
In process costing, materials, labour, and overheads are accumulated separately for each process. Instead of collecting costs for individual jobs, the organisation records the total expenditure incurred by each process during a particular period. This helps determine the total cost associated with every stage of production. Process wise cost accumulation also makes it easier to compare costs between different periods and identify processes where expenditure is excessive. Thus, systematic collection of costs for each process provides useful information for cost control, efficiency measurement, and production planning.
5. Calculation of Average Cost
Since process costing involves large quantities of similar products, the cost of individual units is generally determined on an average cost basis. The total cost incurred in a process is divided by the equivalent units or units produced, after considering relevant adjustments. This gives the average cost per unit. Average costing is appropriate because the products are substantially identical. It also simplifies cost determination where thousands of units are produced continuously. Therefore, calculation of average cost per unit is an important characteristic of the process costing system.
Formula:
Cost per Unit = Total Process Cost ÷ Units Produced
6. Transfer of Output Between Processes
The output of one process is normally transferred to the next process for further production. The cost of the transferred output becomes part of the cost of the receiving process. This continues until the product reaches the final process and becomes finished goods. Transfer of output provides a clear link between different production stages and helps determine the cumulative cost of the product. It also enables management to identify the cost added at each stage. Therefore, inter process transfer of output is a distinctive feature of process costing.
7. Work in Progress
At the end of an accounting period, some units may remain incomplete or partly processed. These units are known as work in progress. Process costing therefore requires proper valuation of opening and closing work in progress. Since incomplete units have received different amounts of materials, labour, and overheads, their cost cannot be treated as fully completed units. The concept of equivalent production is commonly used to calculate their cost. Thus, treatment and valuation of work in progress is an important characteristic of process costing.
8. Normal and Abnormal Loss
Process costing recognises normal loss and abnormal loss arising during production. Normal loss represents unavoidable loss expected under normal operating conditions, such as evaporation, wastage, or shrinkage. Abnormal loss arises when the actual loss exceeds the expected normal level. These losses are separately identified and treated according to costing principles. Proper recording helps management determine the actual efficiency of each process. Analysis of losses also assists in controlling wastage and improving production methods. Therefore, treatment of normal and abnormal losses is an important feature of process costing.
9. Inter Process Profit
In some organisations, inter process profit may be included in the transfer price of output from one process to another. The transferring process may charge the receiving process a price that includes a profit margin over the cost incurred. This helps management evaluate the performance of individual processes as separate responsibility centres. It also allows comparison between the cost of production and the transfer value. However, this practice is used only where management requires process wise performance measurement. Thus, inter process profit may be a feature of certain process costing systems.
10. Suitable for Large Scale Industries
Process costing is particularly suitable for large scale industries where production is continuous and output is produced in substantial quantities. Industries such as textiles, chemicals, cement, sugar, paper, petroleum, and food processing commonly use this method. These industries usually manufacture standardised products through several production stages. Since individual products cannot be conveniently traced separately, process wise accumulation of costs is more practical. The method therefore provides a systematic way to determine production costs and unit costs in large scale manufacturing operations.
Key Differences between Job Costing and Process Costing
| Basis | Job Costing | Process Costing |
|---|---|---|
| Production | Specific | Continuous |
| Cost Unit | Job | Process |
| Products | Customised | Homogeneous |
| Cost Collection | Job-wise | Process-wise |
| Production Size | Small | Large |
| Customer | Specific | General |
| Identification | Job Number | Process Number |
| Cost Calculation | Job-wise | Average |
| Production Flow | Intermittent | Continuous |
| Work-in-Progress | Limited | Significant |
| Losses | Uncommon | Common |
| Output | Variable | Uniform |
| Cost Sheet | Prepared | Not usual |
| Industries | Printing | Cement |
| Profitability | Job-wise | Process-wise |