Question

Discuss the differences between product costing and job costing. What type of company would general use product costing? What type of company would generally use job costing? Give a real world example of each and explain your reasoning.

Answer 1

Solution. Product costing is the process of recording and reporting costs by an organization dealing in single product business incurred during production and sale of goods during an accounting period. Product costing facilitates an organization in preparing inventory valuation and decision making purposes involving price of goods, product line decisions, etcetera.

When an organization deals business in different categories of goods to meet its objective of profit making and surviving in market competition, it employs job costing. Job costing is the process of computing and recording of each individual job costs and revenues assigned by the organization.

Companies dealing with mass production employ product costing. In product costing, for instance, a company abc manufactures drink cans. It decides to ascertain costs using product costing. The company while recording and reporting costs will take into account all costs incurred in converting aluminium(raw material) to finished cans ready to be shipped along with costs incurred while providing service by the company during an accounting year.

Companies dealing with manufacturing can employ job costing. For instance, a company xyz constructs building, decides to ascertain and report cost sheets of a single building in the chosen location, can employ job costing. While recording it will take into account current value of raw materials such as sand, bricks, etcetera; labor hours and expenses; overheads and other expenses accruing to construction of building.