The current paper makes an effort to explain the concept of and comparison between job order costing system and the process costing system with a view to provide help in the process of decision making regarding the adoption of the costing system in question. Various views were considered in order to enable this study and make it instrumental in deciding upon the required costing system to be adopted in the company.
The conclusion submitted is based on a thorough comparison between both the costing systems. The various industries where these two costing systems are dominantly used are also discussed in the paper. The main aim of the paper is to equip the reader with the best possible option to be considered out of the two costing systems for the new company that is being planned to be established.
Job Order Costing and Process Costing are two systems of costing which serve the similar purpose of working out the production cost incurred. The factors that both the costing systems use are the raw materials, labor and the overhead costs that go into the production of the final product. Definitions: However, the name of the costing itself explains the basic difference as to when they are preferred for costing. Fundamentally, Job Order Costing is used when tailor made orders are executed in separate batches whereas Process costing is adopted when a constant process is used to manufacture huge quantities of uniform products. The following literature makes an attempt to give an intricate detailing on both the costing systems i.e. Job Order Costing and Process Costing.
Comparison between Job Order Costing and Process Costing: Despite the fact that both the costing systems serve the same purpose, they have their own advantages and disadvantages as discussed. While job order costing assesses the production cost job/order wise, process costing assesses the production cost by departments. Accounting/ record keeping job becomes tedious when it comes to job order costing system, whereas process costing has a very hassle free accounting/record keeping. Job order costing requires a single work-in-progress account while process costing needs a work-in-progress account for every process. Process costing can be efficiently applied in both manufacturing as well as non-manufacturing concerns/ processes. Overhead cost application process in process costing is much simpler when compared to the overhead cost application in job order costing.
Relevant industries: the basic inputs in arriving at the production costs under both the costing system are same, yet each costing system best suits only certain industries which the other costing system might not work well with. For example process costing system stands good to be adopted in manufacturing firms, utility firms and non-manufacturing firms, while job order costing is popular among contracting jobs such as construction contractors etc. Establishments like hospitals, law firms, repair shops etc. bring into use the job order costing system to ascertain their average cost per unit. Process costing is used by pharmaceutical companies, food & beverage companies, oil refineries, etc.
What best suits our needs: After considering all the pros and cons of both the costing systems, bearing in mind the kind of company that we plan to start, Process costing system best suits our need of the hour. As we plan to produce only one version of the product, process costing would be apt for time being. Further any time in future as and when customized orders are also encouraged, the costing system too can be shifted accordingly to job order costing.
References
1. Blocher, E., D. Stout and G. Cokins. (5th Edition). (2009). Cost Management: A Strategic Emphasis. Irwin: McGraw-Hill.
2. Brock, H. R. (2006). Cost Accounting: Principles and Applications. Irwin: McGraw-Hill.
3. DRURY, C. (2000). Management and Cost Accounting. Australia: Business Press.
4. Horngren, C. T. and G. Foster. (1987). Cost Accounting, A Managerial Emphasis. Prentice-Hall Inc.
