Job Costing Vs. Process Costing: Differences And Their Applications

Fundamental Costing Principle: Different Costs for Different Purposes

There are mainly two types of costs namely Variable cost & Fixed Cost. Examples of variable costs are material, labor & Overheads which keep on changing with the amount of quantity produced. Examples of Fixed Cost are Rent, Electricity and fixed nature of expenses which remains same at any level of quantity produced. A Variable cost shall remain relevant for every job and process because it shall be incurred separately but fixed costs shall not be relevant for every project (Hopper & Bui, 2016).  Job costing and Process costing are two different systems. Both systems are used for cost accumulation and its allocation to each unit completed/Produced. But both are distinct in nature & suitable for different purposes. 

Job Costing is used when products being manufactured are so different that single cost can’t be applied to units produced. Under job costing work is done as per customer requirement. An apt example is the use of job costing in the Automobile Workshop (Maher, 2005). On the other hand, Process Costing is utilized in regular and mass production in Industries that produce units that are alike. Bulb Industry is the one where process costing is noticed on a wide scale.

Relevant costs shall always remain important for decision making of the management. If the sale price of a product covers its relevant cost (variable cost), the product shall be profitable to sell. A cost can be relevant but not every cost is relevant for production. In the case of a Job Costing, even the fixed cost is relevant and it is allocated to the number of units produced (Horngren, 2011). But in the case of Process costing not every cost is charged to the process.

For example:

Material – $ 3 per Kg,

Labor- $ 4 per hour

Overheads- $ 3 per unit

Fixed Cost – $ 60000, Units produced -10000 Nos.

Total Cost per unit will be = $ 3+$ 4 +$ 3 + ($ 50000/10000=$6) i.e $ 16 per unit

Hence it is seen that entire cost incurred is charged to the product cost. However, in the case of Process costing, Cost of the previous stage is carried forward to next stage of the process. In the case of only one stage in the process, the only relevant variable cost shall be the total cost of the product because only that cost was involved in the project (Charles, 2012).  In a factory, 3 products are produced and a 4^th product is being planned to be introduced. Rent paid for the factory in which all 4 products shall be produced shall not be relevant for the 4^th product because even if the 4^th product was not produced, rent would have been still paid. On the other hand, material, labor & overheads for the 4^th product shall be unique and will remain relevant for the 4^th product. It implies that there is a huge difference between the fixed and variable cost because it entirely rests upon the purpose (Horngren & Foster, 2008).  Therefore, different costs are relevant for different purposes.

Job Costing System: Unique Characteristics and Cost Objects

Job costing is specific to the contract and the above difference clearly implies that it is used when a particular contract is targeted.  Hence, the main object of job costing is to accomplish a full contract whereas process costing accomplishes the work at every process steps and is suitable for a particular department.

It can be termed that specific order costing where performance of work is done to cater the customer specific needs and every order comprises of short time span. It rests entirely upon the order that is received from the customer (Drury, 2011).  Every order is unique and need a different amount of labor, material, and overheads and thus each order cost must be computed individually. Thus, cost is accumulated for each individual job worked and varies as per the requirement of the customer (Lanen et. al, 2008)

In process costing, Cost is accumulated according to processes and departments. The total cost of production during the time span is spread over the production of the units because individual identity of units is lost due to regular production (Don & Maryanne, 2006). It implies that the entire cost will rests upon the total production and not on a specific product. Hence, the costs are assessed and accumulated process wise.

Equivalent Units are the units in notional basis representing completed task utilized to apportion costs that is present between work in process and output that is completed. Equivalent production can be described as a method by which work done on units that are unfinished is denoted in terms of units that are completed (Robinson & Last, 2009). The idea behind this is to trace units that would have been completed if the work required to be  done on unfinished units had been done for finished units only. The concept of finding out equivalent units is used for assignment of the process cost to finished and unfinished units.

Transferred-in costs refer to the transferring of closing costs from one process to another so that the total costs can be summed up at the end of the total manufacturing process (Drury, 2011).  These concepts are not used in job costing as in job costing, the cost is accumulated for each individual job worked and the total work is completed without distributing the work in processes, hence there is no need to calculate equivalent units.

The normal costing in an organization refers to the estimated costing used by the management so that the costs can be calculated on the basis of estimated production units and the costs that have actually been incurred in the past. It is done so that the management is able to chalk out a strategy and determines the process (Drury, 2013). It is thereafter compared with the actual costs incurred. It helps in tracking the deviation and take a planned course of action. This comparison is done to find out the variances between actual and normal costs and further steps are taken to control the negative variances (Robinson & Last, 2009). It is helpful for the organization because the differences can be removed at the initial stage and does not suffer at the end.

In Actual Costing, overhead rates are generally calculated by using actual costs incurred an actual production done, whereas, in normal costing, the overhead rates are calculated using the expected production units and actual overhead costs based on past performances (Shim & Siegel, 2009).

1. Establishing budgets – Budgets can be prepared that in turn helps to perform other activities and preparing financial statements.
2. Controlling costs and motivating and measuring efficiencies – the difference or inefficiencies are traced easily and help to eliminate at a very early stage without any potential loss (Shim & Siegel, 2009).
3. Promoting possible cost reduction – As deviations are traced at an early stage, it helps to reduce the cost of the organization.
4. Simplifying cost procedures – it simplifies the procedure of cost and helps the organization to maintain a strong balance.
5. Assigning costs to materials, WIP & finished goods, etc.

The indirect overheads are somewhat difficult to control such as glue, thread, chalks, etc, as it is normal as well abnormal wastage of such kind of small products during varied processes.

The normal costing system is better in enabling the management in controlling overhead costs as the overhead rate that will be calculated will be more realistic irrespective of the quantity of units produced.  It does not depend upon the number of units and hence is more pronounced in nature. As the per unit overhead rate is calculated keeping in mind the actual past performances, the total overhead costs will be estimated accurately and will be more reliable (Vanderbeck, 2013). The past performances are kept into consideration and therefore, the estimation is strong. This helps the management to tame the overhead cost in an efficient manner.

References

Charles, T.S. (2012). Cost Accounting: A Managerial Emphasis. Pearson Education

Don R. H & Maryanne M. M. (2006). Cost Management Accounting & Control. Ohio: Thomas South-Western

Drury, C. M. (2013). Management and cost accounting. Springer.

Drury, C. (2011). Cost and management accounting. Andover, Hampshire, UK: South-Western Cengage Learning.

Hopper, T & Bui, B. (2016). Has management accounting research been critical?. Management Accounting Research, 31, 10-30.

Horngren C T  &  Foster, G. (2008). Cost Accounting: A Managerial Emphasis. United States Edition

Horngren, C. (2011). Cost accounting. Frenchs Forest, N.S.W.: Pearson Australia.

Lanen, W. N., Anderson, S & Maher, M. W. (2008). Fundamentals of cost accounting. NY: Hang Loose press.  

Maher, L. (2005).  Fundamentals of Cost Accounting. McGraw-Hill

Robinson, M., & Last, D. (2009). Budgetary Control Model: The Process of Translation. Accounting, Organization and Society, NY Press

Shim, J. K & Siegel, J G. (2009). Modern Cost Management and Analysis. Barron’s Education Series

Vanderbeck, E J. (2013).  Principles of Cost Accounting. Oxford university press