Process Costing vs. Job Order Costing

Instructor: Christian George
This lesson introduces two traditional costing methods: job order costing and process costing. You'll see examples of both and learn how companies can utilize either or both processes in their business.

Traditional Costing Methods

Joey works at an auto repair shop that provides various services for a variety of vehicles. Laura works at a factory that manufactures millions of microchips for computer processors. Although these two people work in very different companies, they both have something in common. In order to know how to correctly charge their customers for their products and services, these companies must correctly assign costs to know what the true cost of the product or service is.

These two examples above fall into two different types of costing systems: job order costing and process costing. Each of them focus on different ends of the costing continuum, which incorporates specific characteristics, but both are necessary to the business if it wants to know how much it costs them to do what they do and how much to charge their customers.

Job Order Costing

Job order costing is a method of assigning costs to a specific unit or product. For example, a construction project to build a house from beginning to end is a job order. Another example might be the building of a bulletproof SUV for a popular musician. The overall concept here is that the product or service is a one-time event. The auto repair shop that Joey works at will rebuild the engine of Customer A's car. Then it will replace the spark plugs and serpentine belt on Customer B's truck. As they continue to provide repairs, each customer's needs are specific to their vehicles. Joey's boss will assign costs to each of the jobs dependent on the parameters of the job.

Different amounts of resources, whether materials or labor or another resource, are used in each of the job orders. Of course, two customers might go to Joey's auto repair shop to get an oil change, but Customer A has an imported car which makes it difficult and time consuming to reach the oil filter under the car. Customer A's oil change will take one hour. Customer B, who has a domestic car, has an easy to get to oil filter. His oil change takes thirty minutes. Customer A will be charged more because of the additional labor needed to complete the job.

Now that we have looked at job order costing, let's look at the other traditional type of costing method, process costing.

Process Costing

Process costing is a method of assigning costs for a mass quantity of a product or service. For example, a bank provides the same service of receiving deposits to all customers. Another one would be that a company manufactures computer chips for thousands of customers. The concept here is that a company makes many numbers of a product and sells that exactly similar product to everyone.

In each time period, a company using process costing will divide the total costs of producing an identical product or service by the total number of units produced to obtain a per unit price. For example, the company that Laura works at manufactures 1 million computer chips in 2015, and the cost to manufacture all of the chips was $20 million. Each chip costs her employer $20 to manufacture.

The Middle Ground

Many companies utilize both methods of assigning costs because they provide products or services that qualify for both methods of costing. Let's look at an example of the costing process for the auto repair shop that Joey works at in the following chart.

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