Question

Differentiate Job Order Costing & Process Costing with the help of examples. Write five salient points of each cost system

Answer 1

Job Order Costing

Job order costing is a method of assigning costs to a specific unit or product. For example, a construction project to build a house from beginning to end is a job order. Another example might be the building of a bulletproof SUV for a popular musician. The overall concept here is that the product or service is a one-time event. The auto repair shop that Joey works at will rebuild the engine of Customer A's car. Then it will replace the spark plugs and serpentine belt on Customer B's truck. As they continue to provide repairs, each customer's needs are specific to their vehicles. Joey's boss will assign costs to each of the jobs dependent on the parameters of the job.

Different amounts of resources, whether materials or labor or another resource, are used in each of the job orders. Of course, two customers might go to Joey's auto repair shop to get an oil change, but Customer A has an imported car which makes it difficult and time consuming to reach the oil filter under the car. Customer A's oil change will take one hour. Customer B, who has a domestic car, has an easy to get to oil filter. His oil change takes thirty minutes. Customer A will be charged more because of the additional labor needed to complete the job.

• The production is generally against customer’s order but not for stock.
• Each job has its own characteristics and needs special treatment
• Each job is treated as a host unit under this method of costing.
• The cost of production of every job is ascertained after the completion of the job.
• Providing proper valuation of work-in-progress at any given time.

Process Costing

Process costing is a method of assigning costs for a mass quantity of a product or service. For example, a bank provides the same service of receiving deposits to all customers. Another one would be that a company manufactures computer chips for thousands of customers. The concept here is that a company makes many numbers of a product and sells that exactly similar product to everyone.

In each time period, a company using process costing will divide the total costs of producing an identical product or service by the total number of units produced to obtain a per unit price. For example, the company that Laura works at manufactures 1 million computer chips in 2015, and the cost to manufacture all of the chips was $20 million. Each chip costs her employer $20 to manufacture.

• The production is continuous
• The product is homogeneous
• The process is standardized
• The output of one process becomes the raw material of another process
• Both direct and indirect costs are accumulated in each process
• The output of the last process is transferred to finished stock