Key Differences Between Job Order Costing and Process Costing
The discordance between calculating the cost of a job order and the process cost gives rise to numerous dialectical disputes. Within the scope of this conversation, let’s consider each concept separately, allowing us to better understand their differences and areas of application. Calculating the cost of a job order, or job batch method, implies determining costs for each specific project or order. Here, a product or service is considered unique and requires special costs.
Industries and Companies Using Job Order Costing
In an art gallery, for example, the price of a painting is set individually, considering the materials, the artist’s time, and other related costs. One shining example could be the company “Boeing,” which produces commercial airplanes according to individual specifications for each customer. Another example is construction companies like Bechtel, which build unique facilities, each with specifications and requirements. These companies meticulously calculate the costs of each project to determine the final price of the product or service.
Industries and Companies Using Process Costing
On the other hand, the calculation of the process cost, or process method, calculates the average price of each element at a particular stage of production. This is common in companies with a continuous production cycle, for example, in a bourbon distillery, where each whiskey barrel should be almost identical in quality and taste. Thus, theoretically, companies with a high level of product differentiation and uniqueness, such as fashion ateliers, design studios, and architectural firms, are inclined to use the job batch calculation method.
Companies that offer standardized goods or services, such as oil refineries, breweries, and cheese manufacturers, use the process method. For instance, Coca-Cola produces millions of identical bottles of its beverages every day, and Nestlé manufactures a massive quantity of standardized products, such as chocolate bars. These companies calculate the average costs of producing each product unit at a particular stage of the production process.
Rationale for Costing Method Selections
Views on these cost methods can differ by the type of company activity and its strategy. If a company aims to mass-produce a homogeneous product, it is more likely to use the process method. If the company is focused on unique projects, it is expected to choose the job batch method. This gives companies flexibility in managing costs and allows them to optimize processes aligned with their strategy and market demand.