How to Calculate Processing & Job-Order Costing

Process costing and job order costing are two distinct ways of figuring per-unit costs in a business. The former refers to a business where the same product is manufactured all the time; since everything is streamlined and there are less variables, it is possible to estimate costs on a large scale.



Job order costing is for industries that work on specific contracts. This includes most service industries and some custom manufacturing industries. Since jobs are specific, they all have specific costs and have to be estimated on a per-job basis.

Instructions

Process Costing

1. Determine what each process is for your business. So, if you run a mass-produced wooden chair company, there will be one process for cutting wood to the correct size, another process for sanding and polishing the wood, another for fastening the pieces together, and so on.

2. Find the cost of each process. This includes (but is not limited to) labor, machinery, maintenance and raw materials. To do this you need to find the total of every thing you spend money on in a process. So, a lathe in the furniture factory mentioned above would cost electricity, the raw input of wood, labor, depreciation, ongoing maintenance, and a proportion of rent for its floorspace.

3. Add the total cost of your processes. You need to essentially repeat step two across your entire shop and find the total cost of every process and add them together. So, for the exemple shop you need to add the total of the lathe that cuts the wood, the sanding area, the assembly area, and any other process that is involved in making chairs.

4. Divide the yearly cost by the amount (or expected amount) of units produced. This is the cost per unit.

Job Order Costing

1. Follow the process costing system for individual jobs. So, if you run a law firm you need to have the details of a lawyer's time spent, photocopying done, electricity used, and any other expenses incurred.

2. Find the total cost of processes not directly associated with production. This includes things like sales and marketing, administrative support, and other such auxiliary costs. Since these costs are not directly associated with each job order you need to disregard them from the job order costing and add them to your overheads.

3. Find the total amount of units produces in a job and divide the total cost by this number. This will give you your per-unit cost.

4. Add the totals of all your jobs to find your total production costs for a period.

Tips & Warnings

• Ensure your records are clear and easy to access.

References

• Future Accountant: Process Costing
• Accounting for Management: Job Order Costing System