Job Order Costing

Process costing is used for homogenous products (continuous flow processes such as producing cans of soda).

Job-order costing is used in situations where the organization offers many different products or services, such as in furniture manufacturing, hospitals, and legal firms. Process costing is used where units of product are homogeneous, such as in flour milling or cement production.

The purpose of a job order cost accounting system is to assign and accumulate costs for each job, i.e., an order, a contract, a unit of production, or a batch. Job order costing should be used if the production or service is being performed to meet customer specifications or requirements, if different components are made for inventory, or projects are undertaken to construct real property. Job order costing allows more control, less estimation, and more direct and reliable allocation of costs.

. Differences between job-order and process costing. The differences between job-order and process costing occur because the flow of units in a process costing system is more or less continuous and the units are essentially indistinguishable from one another. Under process costing:

a. A single homogenous product is produced on a continuous basis over a long period of time. This differs from job-order costing in which many different products may be produced in a single period.

b. Total costs are accumulated by department, rather than by individual job.

c. The department production report is the key document showing the accumulation and disposition of cost, rather than the job-cost sheet.

B. Overview of Process Costing. Manufacturing costs are accumulated in processing departments in a process costing system. A processing department is any location in the organization where work is performed on a product and where materials, labor, and overhead costs are added to the product. Processing departments should also have two other features. First, the activity performed in the processing department should be essentially the same for all units that pass through the department.