- Discuss the similarities between Job-Order and Process Costing
- Discuss the differences between Job-Order and Process Costing


[SLIDE 1]

There are two common methods for determining unit product costs.  They are Job-Order Costing and Process Costing.  We have looked at Job-Order costing in detail over the past few lessons.  Remember how we use the Job-Order costing system where many different products, each with individual and unique features, are produced each period.  This method is typically used in large-scale construction projects, clothing manufacturers, accounting firms, repair shops and manufacturing companies where special products are produced by a customer order.   

Process Costing is used in industries where raw materials are converted into uniform products such as bricks, paper, soda or cereal on a continuous basis.  Examples would include Kellogg's, General Mills, and Scott Paper to name a few.  

The two costing systems have similarities and differences.  Let's look at how these two methods are similar in determining unit product costs.


[SLIDE 2]

The similarities in both systems are:<ul>
<li>They have the same basic purpose which is to assign material, labor, and manufacturing overhead costs to products and to provide a mechanism for computing unit product costs.</li>
<li>They use the same basic manufacturing accounts including Raw Materials, Work in Process, Manufacturing Overhead, and Finished Goods to record costs.</li>
<li>They basically have the same flow of costs through the manufacturing accounts.</li>
</ul>
As you can see, much of the knowledge that we learned in the Job-Order cost system lessons is the same in the process costing system.  However, they do have some differences which we will discuss in further detail.


[SLIDE 3]

The differences in the two methods are:<ul>
<li>Job-Order Cost consists of many different jobs that are worked on during each period, with each job having different production requirements.  All of the costs are accumulated by individual job.  The unit costs are computed by job on a job cost sheet.</li>
<li>Process Cost consist of a single product that is produced either on a continuous basis or for long periods of time with all units of product being identical.  All of the costs are accumulated by department.  The unit costs are computed by department rather than by job.</li>
</ul>
To summarize, Job-Order is based on a job and Process is based on a department.  In order to understand the concept, if you were a manufacturing company making blue jeans, the way you would accumulate cost is by the job because you would make small jobs of different sizes based on customer orders.  In contrast, if you were a cereal manufacturer, you would do a long period of producing one type of cereal to stock in the warehouse.

Those examples may not seem very different but they are. You would not want to produce 60,000 pairs of the same jeans, (i.e. size "44") in one production run but you would want 60,000 of the same type of cereal (i.e. "Cheerios") to sell to customers. The difference is that one product is individual and unique, and the other product is identical on a continuous job.

In the next lesson, we will look at the cost flow in a process costing system in greater detail.