JOB COSTING SYSTEMS VERSUS PROCESS COSTING SYSTEMS

Costing Systems:
Job Costing Systems versus Process Costing Systems

Liberty University
Business 601: Accounting for Decision Making
April 20, 2014

JOB COSTING SYSTEMS VERSUS PROCESS COSTING SYSTEMS

Costing Systems
Cost effectiveness is, The relationship between monetary inputs and the desired
outcome (Cost effectiveness, 2014). In order for companies to be successful, it is vital that they
effectively measure and evaluate their costs. To do this, companies use cost accounting systems.
Blocher, Stout, Juras, and Cokins (2013) describe the two most commonly used cost accounting
systems as job costing and process costing. Both of these costing methods are used, to assign
material, labor, and manufacturing overhead costs to products and to provide a mechanism for
computing unit product costs (p. 99). When choosing a costing system, a company must select a
method that best matches the stream of production in business operations so the costs accurately
correlates with the revenues generated.
Job Costing Systems
Blocher et al. (2013) explains how job costing is used when a business produces
numerous jobs that are unique from one another. Because each job has different production
requirements, costs are accrued on an individual job basis (p. 100). Ingram (2013) describes how
a job cost sheet is used for each job to record the manufacturing costs, which includes direct
material, labor, and overhead costs. This type of accounting costing system effectively allows
managers to calculate their earnings per job, which aids them in assessing the profitability of one
type of job versus another (Ingram, 2013).
There are numerous examples of companies who use job cost accounting in the Hampton
Roads area. The most prevalent is Huntington Ingalls Industries (HII), which is the largest
private shipbuilding company in the United States. HII manufactures various distinctive
submarines and aircraft carriers for the United States Navy. During production HII assigns each
submarine and aircraft carrier a hull number, which is used to differentiate and allocate costs in
all spectrums of the supply chain and manufacturing stages (Product Portfolio, 2014). Another
large industry sector that uses job costing systems in Hampton Roads is new construction

JOB COSTING SYSTEMS VERSUS PROCESS COSTING SYSTEMS

companies. For example, Ryan Homes, one of the major new construction companies in the area,
builds custom homes in a variety of developments. Each home the company builds has different
landscaping characteristics and permit requirements. In addition, each customer can choose
custom features for their home, which also makes the costs of each home unique (About Ryan
Homes, 2014). From a smaller perspective, there are also an abundant amount of small local
businesses that use job costing systems. For example, businesses like painting companies,
automotive repair companies, and bakeries all use job costing accounting because each of their
products are different based on the customers needs.
Process Costing Systems
Process costing is used when a company manufactures the same products on a continuous
basis. Tanner (2013) describes how all of the products manufactured are identical, so if costaccounting were used the cost calculated would always be the same. To calculate process
costing, a company allocates cost to departments within the company based on the average
number of products manufactured per day (Tanner, 2013). Ingram (2013) explains how
accumulating costs by department allows management to distinguish unique workgroup
characteristics and calculate departmental production statistics.
Process costing is mainly used in manufacturing scenarios and industries that convert raw
materials into standardized products (Ingram, 2013). Throughout Hampton Roads there are
numerous companies that utilize process costing. From a commercial perspective, companies
such as Anheuser Busch, Pepsi-Cola, Canon, and Kraft Foods all use process costing to calculate
product cost. When these companies repetitively manufacture their standardized products, they
flow through several assembly phases and each phase has a specific cost amount associated with
its tasks. Through the process costing method, these companies can analyze each production
process to ensure effectiveness and efficiency (Vitez, 2009). Process costing is also used by

JOB COSTING SYSTEMS VERSUS PROCESS COSTING SYSTEMS

small companies. For example, a local brewery called St. George Brewing Company cyclically
produces its own Ales and Lagers and a peanut processing company called Hubbard Peanut
Company processes its own peanuts.
Overview
Job order costing and process costing are both effective ways for companies to compute
product costs. Job costing allows companies to assess cost on an individual product basis
whereas process costing allows companies to evaluate product cost through allocating it by
department processes. Vitez (2009) describes how process costing effectively allows managers to
compare company and departmental performance over time. In addition, Vitzez (2009) explains
how job costing gives managers the ability to assess individual performance based on cost
efficiency, competence and product yield. Understanding and utilizing the proper accounting
costing systems is critical to every companys success. If used appropriately, these costing
systems aid companies in proficiently calculating and evaluating its product costs.

JOB COSTING SYSTEMS VERSUS PROCESS COSTING SYSTEMS

References
About Ryan Homes. (2014). Ryan Homes. Retrieved from http://www.ryanhomes.com/whyryan-homes/about-ryan-homes
Blocher, E.J., Stout, D.E., Juras, P.E., & Cokins, G. (2013). Cost management: A strategic
emphasis (6th ed.). Boston, MA: McGraw-Hill Irwin Publishing. ISBN: 9780078025532
Cost effectiveness. (2014) In Merriam-Websters online dictionary (11th ed). Retrieved from
http://www.merriam-webster.com/dictionary/cost%20effectiveness
Ingram, D. (2013). Advantages & disadvantages of job order costing & process costing. Small
Business Chronicle, Retrieved from http://smallbusiness.chron.com/advantagesdisadvantages-job-order-costing-process-costing-3082.html
Product Portfolio. (2014). Huntington Ingalls Industries. Retrieved from http://www.hun
tingtoningalls.com/about/products
Tanner, D. (2013). Types of costing systems. University of North Florida, Retrieved from
http://www.unf.edu/~dtanner/dtch/dt_ch34.htm
Vitez, O. (2009, Aug 10). Steps in Process Costing. Small Business Chronicle. Retrieved from
http://smallbusiness.chron.com/steps-process-costing-4066.html