Job order costing or job costing is a system for assigning and accumulating manufacturing

costs of an individual unit of output. The job order costing system is used when the various items

produced are sufficiently different from each other and each has a significant cost. (When a

company's output consists of continuous flows of identical, low-cost units, the process

costing system is more appropriate.)

Since there is a significant variation in the items manufactured, the job order costing system

requires a separate job cost record for each item (or each job or special order). The job cost

record will report each item's direct materials and direct labor that were actually used and an

assigned amount of manufacturing overhead.

The job cost records also serve as the subsidiary ledger or documentation for the manufacturer's

cost of the work-in-process inventory, the finished goods inventory, and the cost of goods sold.

Examples of Job Order Costing

A few examples of the use of job order costing are:

 A company that designs and produces custom-made machines and/or machine tooling

 A company that constructs custom-designed buildings

 A company that modifies trucks to meet customers' special needs

Many businesses produce large quantities of a single product or similar products. Pepsi-Cola

makes soft drinks, Exxon Mobil produces oil, and Kellogg Company produces breakfast cereals

on a continuous basis over long periods. For these kinds of products, companies do not have

separate jobs. Instead, production is an ongoing process.

 A process cost system (process costing) accumulates costs incurred to produce a product

according to the processes or departments a product goes through on its way to completion.

Companies making paint, gasoline, steel, rubber, plastic, and similar products using process

costing. In these types of operations, accountants must accumulate costs for each process or

department involved in making the product. .

Can you imagine having to determine the cost of making just ONE lego when we can make 1.7

million legos per hour? Cost accountants have to do this. They will use process

costing! Accountants compute the cost per unit by first accumulating costs for the entire period

(usually a month) for each process or department. Second, they divide the accumulated costs by

the number of units produced (tons, pounds, gallons, or feet) in that process or department.

EXAMPLE: From Department A, products go to Department B. Department B inputs direct

materials and further processes the products. Then Department B transfers the products to

Finished Goods Inventory.

There are two methods for using process costs: Weighted Average and FIFO (First In First

Out). Each method uses equivalent units and cost per equivalent units but calculates them just a

little differently.

Job order costing - work is broken into jobs; auto mechanics, carpenters, painters, print shops, computer

each job is tracked separately repair

Process costing - a large quantity of identical auto assembly plants, hot dog manufacturing, any large

or similar products are mass produced mechanized production facility

Job costing and process costing have important similarities:

 Both job and process cost systems have the same goal: to determine the cost of products.

 Both job and process cost systems have the same cost flows. Accountants record

production in separate accounts for materials inventory, labor, and overhead. Then, they

transfer the costs to a Work in Process Inventory account.

 Both job and process cost systems use predetermined overhead rates to apply overhead.

Job costing and process costing systems also have their significant differences:

 Types of products produced. Companies that use job costing work on many different jobs

with different production requirements during each period. Companies that use process

costing produce a single product, either on a continuous basis or for long periods. All the

products that the company produces under process costing are the same.

 Cost accumulation procedures. Job costing accumulates costs by individual jobs. Process

costing accumulates costs by process or department.

 Work in Process Inventory accounts. Job cost systems have one Work in Process

Inventory account for each job. Process cost systems have a Work in Process Inventory

account for each department or process.

REFERENCE

Larry, M. W & Skousen, J. (2019). Managerial and Cost Accounting [PDF File].

Retrieved from http://bookboon.com

Steven, E. (2019, February 7). The Difference Between job Costing and Process Costing.

Retrieved from www.accountingtools.com.

Wilkinson, J. (2013, July 24). Job costing. Retrieved from http://strategico.com