Comparison of Job-Order Costing and Process Costing
Both product-costing systems have similar objectives: accumulate total product costs and
assign those costs to each unit manufactured.
A company that uses a job-costing system
produces goods by order or in distinct batches, and the products tend to differ
significantly from each other.
With a process-costing system, a company works in a
repetitive production environment, manufacturing a large number of like units in a
Industries that use process costing include those involved with paper,
petroleum, lumber, disposable diapers, and chemicals.
Costs in a job-order system are accumulated by job; in a process-costing system, the costs
are accumulated by department or process.
The flow of costs through general ledger
accounts is similar in both systems: through Work in Process, to Finished Goods, to Cost
of Goods Sold.
In a sequential production operation, each department establishes its own
Work-in-Process (WIP) account.
Each department’s WIP account is used to accumulate
The cost remaining in each department’s WIP at the end of each period is of
interest, as is the cost assigned to those products that are transferred to the next
Most of the time, once a product has been completed, it is transferred to the
At the end of the period, we may have some units that have not been
completed, and these units must have cost assigned to them.
Since these units are only
partially completed, we have to look at the percentage completion of these units before
we assign costs.
Equivalent units is a key concept in process costing.
The term equivalent unit cost refers
to the amount of conversion and direct-materials dollars that have been applied to
physical units after adjusting for the stage of completion.
Units in the ending Work-in-Process Inventory are only partially completed and may be
in different stages of production.
For example, 100% of the materials may be
present in the product, but only 50% of the conversion
work (labor and overhead)
may have been performed.
Conversion costs are usually added continuously throughout the process.
Thus, if 100
units are 60% of the way through the process, the company is said to have performed
60 equivalent units of work during the period.
The firm is said to have done the
to manufacturing 60 finished units.
But, none of the units are
conversion = the sum of direct labor and overhead costs, by definition