When to Use Each System
Job order costing is used when production consists of distinct, identifiable units or batches — each job is different and its costs are tracked separately. Custom construction, legal services, consulting projects, print shops, aircraft manufacturing, and wedding catering all use job order costing. The question it answers: what did this specific job cost?
Process costing is used when production is continuous and homogeneous — the same product flows through the same processes in large quantities, and it is impossible or impractical to assign costs to individual units. Oil refining, paint manufacturing, breakfast cereal production, and paper manufacturing all use process costing. The question it answers: what is the average cost per unit produced this period?
| Dimension | Job Order Costing | Process Costing |
|---|---|---|
| Product type | Distinct, customised jobs | Homogeneous, mass-produced |
| Cost accumulation | Per job (job cost sheet) | Per process/department per period |
| Key document | Job cost sheet | Production cost report |
| WIP complexity | Separate WIP per job | Requires equivalent units calculation |
| Unit cost | Actual cost of each job | Average cost per equivalent unit |
Job Order Costing: How It Works
In job order costing, costs are accumulated on a job cost sheet for each job. Three types of costs are added as the job progresses: direct materials (based on materials requisitions), direct labour (based on time sheets), and manufacturing overhead (applied using a predetermined overhead rate).
(Common cost drivers: direct labour hours, machine hours, direct labour cost)
Applied overhead = POHR × Actual cost driver usage for the job. At year-end, the difference between actual overhead incurred and overhead applied is either over-applied or under-applied overhead. If immaterial, the difference is closed to Cost of Goods Sold.
Job Order Costing: Full Worked Example
Craftworks Ltd uses machine hours as its cost driver. Budgeted overhead: $480,000. Budgeted machine hours: 40,000. POHR = $480,000 ÷ 40,000 = $12 per machine hour. Job #214 uses: direct materials $8,500; direct labour 60 hours at $20/hour; machine hours 120.
| Cost Component | Calculation | Amount |
|---|---|---|
| Direct materials | Per requisitions | $8,500 |
| Direct labour | 60 hrs × $20 | $1,200 |
| Manufacturing overhead applied | 120 machine hrs × $12 | $1,440 |
| Total job cost | $11,140 |
Add direct labour: DEBIT WIP $1,200 / CREDIT Wages Payable $1,200
Apply overhead: DEBIT WIP $1,440 / CREDIT Manufacturing Overhead $1,440
Transfer to finished: DEBIT Finished Goods $11,140 / CREDIT WIP $11,140
Record sale: DEBIT COGS $11,140 / CREDIT Finished Goods $11,140
Process Costing: How It Works
In process costing, costs are accumulated by department (process) for the period. At month-end, total costs are divided by total equivalent units produced to get an average cost per equivalent unit, which is then used to value units completed and units still in process.
Equivalent Units: The Heart of Process Costing
An equivalent unit represents the amount of work done on a partially completed unit expressed as a fraction of a complete unit. If 500 units are 40% complete, they represent 200 equivalent units (500 × 40%). Equivalent units must be calculated separately for materials and conversion costs (labour + overhead) if materials are added at a different point than conversion.
Cost Per Equivalent Unit = (Beginning WIP Costs + Current Period Costs) ÷ Equivalent Units
Process Costing: Full Worked Example
Smoothie Factory: Beginning WIP 200 units (60% complete for conversion; materials 100% complete). Units started: 1,800. Units transferred out: 1,700. Ending WIP: 300 units (40% complete for conversion; materials 100% added). Beginning WIP costs: materials $500, conversion $420. Current costs: materials $4,500, conversion $7,000.
| Materials | Conversion | |
|---|---|---|
| Transferred out | 1,700 | 1,700 |
| Ending WIP (300 units × 100% / 40%) | 300 | 120 |
| Total equivalent units | 2,000 | 1,820 |
| Materials | Conversion | |
|---|---|---|
| Beginning WIP costs | $500 | $420 |
| Current period costs | $4,500 | $7,000 |
| Total costs | $5,000 | $7,420 |
| ÷ Equivalent units | 2,000 | 1,820 |
| Cost per equiv. unit | $2.50 | $4.077 |
Cost of units transferred out: 1,700 × ($2.50 + $4.077) = 1,700 × $6.577 = $11,181. Cost of ending WIP: (300 × $2.50) + (120 × $4.077) = $750 + $489 = $1,239. Total costs accounted for: $11,181 + $1,239 = $12,420 ✓ (equals beginning WIP costs + current costs: $920 + $11,500 = $12,420).
Hybrid and Operation Costing Systems
Many companies use hybrid systems. Operation costing applies process costing for conversion costs (since conversion happens in batches through similar processes) but job order costing for materials (since different batches use different materials). Clothing manufacturers and semiconductor companies often use operation costing.
Key Exam Distinctions
- In job order costing, each job has its own WIP account (or job cost sheet). In process costing, WIP is accumulated by department
- Process costing requires equivalent unit calculations whenever there is beginning or ending WIP
- The weighted average method combines beginning WIP costs with current costs; FIFO separates them — know which method the question specifies
- Transferred-in costs (costs passed from a prior department) are treated like a separate material in the receiving department's process costing calculation
Step 2: Calculate equivalent units
Step 3: Calculate cost per equivalent unit
Step 4: Assign costs to transferred-out units and ending WIP
Step 5: Verify: total costs assigned = total costs to account for
Practice Job Order and Process Costing Questions
PrepQBank covers both costing systems with adaptive questions — from basic job cost sheets to multi-department process costing with transferred-in costs.
Practice cost accounting →