Job Order Costing
Job order costing is a form of accounting that attributes individual costs directly to a completed job or service rather than to the manufacturing department.
It is utilised when things are created to order or when it is simple to trace individual expenses to specific activities, presuming that the additional information adds value. Under these circumstances, it is straightforward to attribute particular expenses to specific projects.
Assume, for instance, that a homeowner desires to build a custom deck for her home. Also, imagine that she needs a custom-designed deck to accommodate the topography of her lot and her intended uses for the addition. Her contractor will design, price, and build the deck.
This project’s final cost will be unique. If another homeowner asked the contractor to build a deck, the contractor would go through the same design and price process; however, you would anticipate the design and costs to be different from those of the deck in the previous example, as the decks would be unique.
In contrast, process costing is utilised when the production process is continuous, making it impossible to determine how much of each material and how much time is spent on each unit of the completed product.
In process costing, costs are therefore accounted for by the manufacturing process or production department rather than by product or by the job. This strategy is effective for product manufacturers.
Job Costing or Process Costing?
The increase of automation in the manufacturing process, which is often followed by a decrease in direct labour, is a factor that might complicate the decision between task order costing and process costing. The cost of the increase in equipment (generally indicated as depreciation expense) is allocated to overhead, although the lower requirement for labour normally results in a reduction in direct labour costs.
Due to these challenges, some businesses opt for a hybrid system, employing process costing to account for the mass production of a part and work order costing to account for the assembly of some of those individual pieces into a custom product.