21.1 Compare and Contrast Job Order Costing and Process Costing

When to Use Each System

The choice between job order costing and process costing depends on the nature of the products and production process.

Job Order Costing Recap

Used When:

• Products are unique or customized
• Each job is different
• Small batches or individual orders
• Costs tracked by job

Examples:

• Custom furniture
• Construction projects
• Consulting services
• Catering events
• Custom manufacturing

Process Costing

Used When:

• Products are identical or very similar
• Large quantities produced
• Continuous or repetitive process
• Costs tracked by process/department
• Average cost per unit calculated

Examples:

• Bread baking (identical loaves)
• Soft drink bottling
• Food processing
• Chemical manufacturing
• Oil refining
• Paper production

Key Differences

Aspect	Job Order Costing	Process Costing
Product Type	Unique, customized	Identical, homogeneous
Production	Small batches, jobs	Large quantities, continuous
Cost Accumulation	By job	By process/department
Cost Calculation	Total job cost ÷ units in job	Total process cost ÷ units produced
Work in Process	Multiple jobs, each tracked separately	Continuous flow, units in process
Cost Records	Job cost sheet per job	Process cost report per process
Unit Cost	Calculated per job	Average cost per unit
When Used	Custom work, services	Mass production

Production Flow Comparison

Job Order Costing Flow:

Job #101 → Job #102 → Job #103
(Each tracked separately)

Process Costing Flow:

Process A → Process B → Process C
(Continuous flow, costs by process)

Hybrid Systems

Some businesses use both systems:

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

Example: A furniture company:

• Custom furniture: Job order costing
• Standard furniture line: Process costing

Luxembourg Business Examples

Process Costing:

• Food Processing: Mass production of food products
• Beverage Production: Bottling operations
• Bakery (Standard Products): Identical bread loaves
• Chemical Manufacturing: Homogeneous products
• Textile Manufacturing: Continuous production

Job Order Costing:

• Custom Manufacturing: Unique products
• Construction: Each project different
• Service Companies: Each client unique
• Craft Businesses: Each item unique

Choosing the Right System

Use Process Costing When:

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

Use Job Order Costing When:

• Products are unique
• Custom orders
• Small batches
• Can identify individual jobs
• Need cost per job

Luxembourg Compliance Note

In Luxembourg:

• Both systems are acceptable for internal management
• Choose system that fits your business
• PCN accounts support both systems
• Cost records must be maintained
• System should provide accurate cost information

Think It Through

Why would a bakery use process costing for standard bread but job order costing for custom wedding cakes? What are the key differences in these products?

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