Job Costing and Process Costing Systems
Job-order costing is used in situations where the organization offers many different products or services, such as in craft manufacturing, hospitals, and legal firms. This system is used by companies whose products, or its wide range of products, are treated as individual jobs. These companies receive requests from customers that include detailed specifications regarding the product. The specifications are used as a basis for estimating the total cost of completing the job and submitting a bid or the cost to the customer.
Process costing is used where units of product are homogeneous, such as in flour milling or cement production on a continuous basis. Manufacturing costs, unlike job-order system, are accumulated in processing departments rather than individually. However, the two systems also share the same characteristics. The basic purpose of the two system is to assign material, labor and overhead cost to its product, and the flow of cost through the manufacturing accounts is basically the same (Manufacturing Overhead, Raw Materials, Work in Process and Finished Goods).
The differences between the two systems are more obvious than its similarity. Process system manufactures a single homogenous product that is produced on a continuous basis over a long period of time, while job-order costing may manufacture many different products in single period. This is because production in job-order costing is done individually and not departmentally. And that is why process costing key document is the department production report of costs accumulation while job-order costing key document is the individuals job-cost sheet.
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