Question

• How does process costing differ from job order costing?
• When is process costing used instead of job-order costing? Can a company simply choose one method over the other because it likes one method better?
• Which two types of product costs are typically added together in process costing? Why are they combined?

Answer 1

Process costing is usually applied in production which involves non standardized items and produced in bulk. They are not customer order driven and hence it is mass production based on specification defined for each production process. The production usually flows through 2 or more processes before final product is manufactured. Process costing is usually deployed in industries like petroleum, Sugar , chemicals, oil, mass manufacturing like pencil, pen, etc

Job order Costing is Customer order driven and has a identity to it because it is carried out according to customer specifications. It is time consuming and usually takes long time to complete the order. Examples of Job order costing - Aircraft manufacture, shipping , furniture, food catering ,etc

Process Costing is used for lengthy production runs involving products that are indistinguishable from each other. Also Process costing will usually involve a standard percentage of normal loss in it. Process costing cannot be used in orders which are customer driven.

Choice of method of costing is not based on liking.It would depend on each product being manufactured. Some factors which will decide are

1. Uniqueness of product
2. Production size
3. Production losses
4. Record keeping

Two type of product cost that is added together in process costing are Raw material and Direct labor. This is because the production takes place in a process together and segregation is not possible. Hence product costs are added together. Costing of individual product is quite difficult because it is mass production and done on large scale basis.