What types of companies would be more likely to use job order costing versus process costing?

Job order costing is a system of expense monitoring in which a business only creates products to fill customer/client orders. Employees complete job order cost sheets for each order and usually separate expenses into three main categories: direct material, direct labor and manufacturing overhead. Companies in many industries can use job order costing, though a variety of product offerings/services complicates the tracking of expenses.

Job Order Costing in Manufacturing Companies

Manufacturing companies incorporate job order costing as a means of controlling usage of raw materials, production equipment and labor hours. These businesses consider each customer order a separate job for the purposes of job order costing. Alternatively, manufacturers may group smaller value projects together under a single job heading.

How manufacturers group jobs depends on the size of the company. For example, a small business manufacturer may consider any job valued over $1,000 as a single job, but they may group smaller customer orders together in blocks of $1,000 for costing purposes.

White Collar Businesses

Companies in the white collar sector of business, including law firms, accounting businesses and private investment companies, can utilize job order costing to manage individual client accounts. For example, accounting firms can consider each individual client a job. Firms complete job order cost sheets each business day, detailing how accountants are handling client accounts and how many hours a client's needs consume each day. This generates daily costs that businesses can use to measure how much money firms bring in each day versus the costs associated with job activities.

Medical Services Businesses

Medical services businesses, including hospitals, small doctor's offices and medical billing companies, can use job order costing to consider each patient or bill as an individual job. Record-keeping for job order costing in service industries, including the medical field, can be more complex than in other industries because these businesses offer a wide array of services, according to Accounting For Management, a business accounting information website.

This requires medical service businesses and other service companies to keep detailed records of each specific job to determine costs correctly. For example, a doctor's office may order patients based on the purpose of visits and the cost of treatments administered.

Film Studios/Retail Companies

Retail companies, including clothing producers and retail outlets, employ job order costing to track sales of clothing by size, individual articles and broader styles. This allows retail companies and other businesses to track expenses to create a variety of job order cost models to show how costs vary from product to product. Businesses in the entertainment industry, including film studios, can create separate job order cost sheets for each film the studios create.

Job order cost sheets for film companies contain actor salaries, director payments and crew wages as direct labor costs. Direct material costs can include props, costumes, utility costs for sound stages and set design fees.

Job costing involves the detailed accumulation of production costs attributable to specific units or groups of units. For example, the construction of a custom-designed piece of furniture would be accounted for with a job costing system. The costs of all labor worked on that specific item of furniture would be recorded on a time sheet and then compiled on a cost sheet for that job. Similarly, any wood or other parts used in the construction of the furniture would be charged to the production job linked to that piece of furniture. This information may then be used to bill the customer for work performed and materials used, or to track the extent of the company's profits on the production job associated with that specific item of furniture.

Process costing involves the accumulation of costs for lengthy production runs involving products that are indistinguishable from each other. For example, the production of 100,000 gallons of gasoline would require that all oil used in the process, as well as all labor in the refinery facility be accumulated into a cost account, and then divided by the number of units produced to arrive at the cost per unit. Costs are likely to be accumulated at the department level, and no lower within the organization.

Job costing and process costing can be used in both manual and computerized accounting environments.

Given these descriptions of job costing and process costing, we can arrive at the following differences between the two costing methodologies:

Uniqueness of Product

Job costing is used for unique products, and process costing is used for standardized products.

Size of Job

Job costing is used for very small production runs, and process costing is used for large production runs.

Record Keeping

Much more record keeping is required for job costing, since time and materials must be charged to specific jobs. Process costing aggregates costs, and so requires less record keeping.

Customer Billing

Job costing is more likely to be used for billings to customers, since it details the exact costs consumed by projects commissioned by customers.

Hybrid Systems

In situations where a company has a mixed production system that produces in large quantities but then customizes the finished product prior to shipment, it is possible to use elements of both the job costing and process costing systems, which is known as a hybrid system.

What type of companies can use job order costing or process costing?

Which company would most likely use job order costing?

Which types of companies would use job costing rather than process costing Why?

Why would a company choose a job costing process over processing costing?