What is the Difference Between Process and Calculation in Job Order Costing?
Process costing and job order costing are very similar. Indeed, there are many situations where they can be the same thing. But the general rule is that process costing is broad-based, while job order costing is based on an individual job.
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Process Costing
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Process costing applies to manufacturing and services that are uniform and continuous. If the same amount of the same product is going to be produced every single day, then you can use process costing to help determine a selling price. You will need to find the cumulative cost of every process and add them together. Divide a period of time's process cost by the number of units to determine the per-unit cost.
Job Order Costing
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Job order costing applies to industries that are not uniform, but rather produce goods or provide services in line with a client's specific needs. You cannot process cost multiple job orders because they do not have uniformity or continuity. If one client requests 8,000 pairs of blue jeans and another requests 5,000 Hawaiian shirts, the processes behind making these two items are going to be dramatically different.
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Overlaps
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You can use process costing within a type of job order. This is because one job over a period of time has both of the characteristics of the process costing mentioned above, uniformity and continuity. So, you can apply process costing within one type of job order but you cannot apply it between them.
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Comments
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Instead of using a pre-determined rate based on estimates, why not base the overhead rate on the actual total manufacturing overhead cost and the actual total amount of the activity base incurred on a monthly, quarterly, or annual basis? If an actual rate is computed monthly or quarterly, seasonal factors in overhead costs or in the activity base can produce fluctuations in the overhead rate. For example, the costs of heating and cooling a factory in Illinois will be highest in the winter and summer months and lowest in the spring and fall. If the overhead rate is recomputed at the end of each month or each quarter based on actual costs and activity, the overhead rate would go up in the winter and summer and down in the spring and fall. As a result, two identical jobs, one completed in the winter and one completed in the spring, would be assigned different manufacturing overhead costs. Many managers believe that such fluctuations in product costs serve no useful purpose. To avoid such fluctuations, actual overhead rates could be computed on an annual or less-frequent basis. However, if the overhead rate is computed annually based on the actual costs and activity for the year, the manufacturing overhead assigned to any particular job would not be known until the end of the year. For example, the cost of Job 2B47 at Yost Precision Machining would not be known until the end of the year, even though the job will be completed and shipped to the customer in March. For these reasons, most companies use predetermined overhead rates rather than actual overhead rates in their cost accounting systems. The use of such a rate enables an enterprise to determine the approximate total cost of each job when completed. In recent years increased automation in manufacturing operations has resulted in a trend towards machine hours as the activity base in the calculation.
