Skip to main content

20.1 Compare and Contrast Job Order Costing and Process Costing

Two Main Costing Systems​

There are two primary costing systems used in manufacturing and service businesses: job order costing and process costing. The choice depends on the nature of the business and its products or services.

Job Order Costing​

Job order costing is used when products or services are unique, customized, or produced in small batches. Each job is distinct and can be separately identified.

Characteristics:

  • Each job is unique
  • Costs are accumulated by job
  • Jobs can be separately identified
  • Different jobs may have different costs
  • Used for customized products/services

When to Use:

  • Custom manufacturing
  • Construction projects
  • Service companies (consulting, legal, accounting)
  • Printing and publishing
  • Repair shops
  • Catering and event services
  • Craft and artisan businesses

Example:

  • Custom furniture maker: Each piece is unique
  • Construction company: Each building is different
  • Consulting firm: Each client project is unique
  • Catering service: Each event is different

Process Costing​

Process costing is used when products are homogeneous (identical or very similar) and produced in large quantities through continuous processes.

Characteristics:

  • Products are identical or very similar
  • Costs are accumulated by process or department
  • Cannot easily identify individual units
  • Average cost per unit is calculated
  • Used for mass production

When to Use:

  • Food processing
  • Chemical manufacturing
  • Oil refining
  • Beverage production
  • Assembly line manufacturing
  • Textile manufacturing

Example:

  • Soft drink bottling: All bottles are identical
  • Bread baking: All loaves are the same
  • Oil refining: Products are homogeneous
  • Paper manufacturing: Continuous process

Comparison Table​

CharacteristicJob Order CostingProcess Costing
Product TypeUnique, customizedHomogeneous, identical
ProductionSmall batches, jobsLarge quantities, continuous
Cost AccumulationBy jobBy process/department
Cost CalculationTotal job cost ÷ units in jobTotal process cost ÷ units produced
Work in ProcessMultiple jobs in processContinuous flow
Cost RecordsJob cost sheet for each jobProcess cost report
When UsedCustom work, servicesMass production

Choosing the Right System​

Use Job Order Costing When:

  • Products/services are unique
  • Each job is different
  • Need to track costs by job
  • Custom orders
  • Service businesses

Use Process Costing When:

  • Products are identical
  • Mass production
  • Continuous process
  • Cannot identify individual units
  • Average cost is sufficient

Hybrid Systems: Some businesses use both systems:

  • Different departments use different systems
  • Some products use job order, others use process
  • Combination approach

Luxembourg Business Examples​

Job Order Costing:

  • Catering Services: Each event is unique
  • Custom Furniture: Each piece is different
  • Consulting Firms: Each client project is unique
  • Printing Services: Each print job is different
  • Construction: Each project is unique
  • Artisan Crafts: Each item is unique

Process Costing:

  • Food Processing: Mass production of food products
  • Beverage Production: Bottling operations
  • Chemical Manufacturing: Continuous processes

Luxembourg Compliance Note​

In Luxembourg:

  • Both costing methods are acceptable for internal management
  • Financial reporting may require specific costing methods
  • PCN accounts support both systems
  • Cost records should be maintained for tax purposes
  • Choose the method that best fits your business

Think It Through​

Why would a custom furniture maker use job order costing while a bread bakery uses process costing? What are the key differences in their operations that lead to this choice?