Short note: job and process costing

Costing methods collect the cost of producing goods or services and assign it to units. The method depends on the nature of production.

Job costing

• Used when work is done in separate jobs or orders, each different and to customer specification (building construction, repair workshop, printing, machinery fabrication).
• A job cost sheet is opened for each job. Direct material, direct labour and a share of overhead are charged to it.
• The cost of a job is known only when the job is complete. Profit is found job by job.
• Overhead is applied with a predetermined rate (e.g. per labour hour).
• Advantages: gives exact cost and profit of each job; helps in quotations and control.
• Limitations: clerical work is heavy; costs are known late.

Process costing

• Used when production is continuous, standardised and mass-produced, passing through successive processes (cement, sugar, chemicals, textiles, oil refining).
• Costs are collected process by process for a period, not by order.
• Cost per unit of a process = (total cost of the process − value of scrap) / equivalent output units. The output of one process becomes the input of the next.
• Normal and abnormal losses, scrap, and work-in-progress (via equivalent units) must be accounted for.
• Advantages: simple, cheap records, suits large output.
• Limitations: gives only average cost; individual unit cost is not known.