Job Costing vs Process Costing Accounting Practices: What’s Better for Your Business?

Job Costing vs Process Costing Accounting Practices

Is your business under your control, or is the business controlling you? This lack of control is a frustration common to many entrepreneurs. Having full control of a business takes time, and usually, the day doesn’t have enough hours to get everything done.

Another big source of anxiety that business owners have to power through is money. A survey by Guidant Financial, in 2019, found that what challenges small businesses the most is a lack of cash flow or capital.

Making mistakes and losing money will often result in less cash to operate with. Getting additional capital becomes even harder to find.

So, how can time be efficiently managed to help generate higher profits?

Most successful entrepreneurs and business owners gain control over their business operations. They also maintain profitability and make better decisions using cost accounting strategies.

Difference Between Job Costing And Process Costing

The main objective of all costing systems is to take into account all the costs required to deliver a service or manufacture a product. The two main ways this goal can be accomplished is either through process costing or job costing.

However, the costing system you pick depends on the kind of business you’re currently operating. Below are a few explanations you can look at to see what best applies to your company/business.

Process Costing

Process costing is used when a service or product you produce is close to identical or identical. Take, for instance, a company that makes black plastic combs.

Manufacturing the combs involves processes that require labor and material costs. The business incurs costs as the product is moved from department to department.

Now, many companies usually offer more than one service or product. The process costing they use here entails them manufacturing batches of the same product. Batch A might consist of 2,000 black combs and batch B having 1,000 pink ones.

The manufacturer attempts to make adjustments to be able to switch from product to product. They do this by making the batches slightly different.

In fact, the costs accrued to bring in different materials as well as to change machine settings are part of the overhead cost of each product.

Process costing is often a lot easier for business owners because the business only has to track the costs for certain batches.

On the other hand, job costing will require the business owner or entrepreneur to manage dozens of individual projects.

Job Costing

Job costing systems assume that work is completed on a project-by-project basis and the cost needed for each task is different. Individuals that do business in the trades, like tree service companies, plumbers and carpenters use job costing systems. This system provides customers with job estimates.

For example, if you need some trees to be removed, the tree service business you choose to engage with will typically estimate the materials.

They will also look into equipment and labor costs needed for the whole project, make a profit margin addition, an then provide an estimate.

Every project is different, given how far your home is and the location and size of the tree to be removed. The good news is, the right ERP job costing software can make this significantly easier.

The set of assumptions job costing uses is entirely different. It organizes similar raw information in a completely different way. Here, indirect and direct costs are attached to all procedures involved in a particular project/job.

Say you have a business that builds custom homes. Each home has many processes involved in its building, and no 2 home-building projects are identical.

Why Can’t You Just Do Both?

Some companies do. The process costing systems work better when your products are all similar or identical. However, job costing makes a lot more sense when the products are unique and different.

There are normally some common processes between products as well as a few variations between one product and another.

Take labor, for instance. When employees clock in for work, what are they asked to track? If they’re painters, maybe they’ll be asked to check the “painting”, so that the business can know where in the process the cost of their labor should be allocated to.

If they’re working on a new library building being set up, they might be asked to jot down “library” when they’re clocking in for work, so that the business knows what job they’re doing.

Many businesses out there use both systems, however, if you want to achieve the same you’ll have to ensure your attendance and timekeeping systems are equipped to effectively handle both sets of information.

It’s also important that your data staff understand how to gather and organize this said data once they’ve received it.

Reviewing Types Of Costs

To set-up effective process costing or job costing systems, you’ll need to be able to differentiate between indirect and direct costs or overhead costs.

Overhead costs are often the hardest costs to assign, and entrepreneurs frequently find it very difficult when it comes to analyzing these costs.

Overhead costs usually can’t be directly traced to a particular service or product.

For instance, if your business manufactures baseball gloves, the amount of leather material used in each glove is something that can be computed, as well as the labor costs it took to operate the machines involved in the manufacturing process.

As a result, labor and material costs are often classified as direct costs.

What Next?

As process costing and job costing are used in very many different industries, there can’t be many comparisons between them.

Even though they are totally different methods in general, the main difference between them is that job costing typically needs higher degrees of supervision, while process costing doesn’t.

Hopefully, this brief guide has helped you get closer to understanding what accounting practice will work best for your business. With that said, what one gets largely depends on how much thought they put into the whole process.

For more information on up-leveling your business, check out the business section of our blog!

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