Importance of Job Costing Vs. Process Costing

Financial analysis

Costing is one of the most fundamental accounting tasks in managing a manufacturing industry. The price of a finished product, launched by any business is a function of manufacturing costs. In today’s competitive market, where there are multiple players fighting for a small market share, product price control is one of the most important managerial concerns. There are a range of different costing methods used to determine the overall monetary investment in the manufacturing of a product. Two prime types include job costing and process costing.

About Costing

Accounting forms the backbone of any business, by keeping a tab on every penny or dollar spent, owed or earned. One of the prime objectives, or some would say the only objective of running a business is making profit and it can be maximized through control over manufacturing costs. The profit margin through the sale of any finished product is largely dependent on the manufacturing cost. 

Cost accounting or costing is all about determining the costs of each manufacturing component, including raw material, process running costs, labor or overhead costs that add up to make the manufacturing cost of a product. To make a manufacturing process more efficient and reducing overall expenses, a scrutiny of manufacturing costs in molecular detail is necessary. Two of the main types of costing are job costing and process costing.

Prime Differences

At the outset, let me define what is job costing. It is a cost accounting method wherein the overall cost of manufacturing a product is determined according the job type. It involves the calculation and summing up of raw material cost, labor cost and other expenses involved in the manufacturing of a single type of product, to determine the cost of production per finished product. 

It is used in industries which produce multiple types of products in different batches, according to customer requirements. The cost of manufacturing per product is determined by dividing the total job or batch cost, by the number of jobs manufactured. All the data is tabulated in customized job cost sheets.

Process costing is an accounting method used in industries which mass produce identical items in thousands or even millions. Since the product created is the same and the process of manufacturing is the same, there is no need to account for the cost of each job separately. Hence, process costing involves the valuation of the entire process costs. To obtain the cost of manufacturing per product, the process cost is divided by the total number of finished products. 

Thus the distinction between the two accounting methods lies in the fact that job costing calculates price according to finished product, while process costing focuses on the entire processing costs only, as the finished product is the same. It can determine the running costs of each department involved in manufacturing, for a fixed period of time, as the final product cost remains unchanged. On the other hand, job costing is used when customized products are created that differ in their manufacturing process. Due to the homogeneous nature of products, process costing is simpler compared to job costing which needs individual analysis for every job type. 

The prime difference between the two methods to be remembered is that job costing is best suited for an industry that creates a range of different products, while process costing is ideally suited for industries that mass produce the same item in a large number. If there is diversity in products, it makes sense to calculate expenses through job costing and when an identical product is manufactured, using process costing makes sense.