Job Costing vs Process Costing Accounting Explained

To analyse the efficiency or the inefficiency of each department or process involved the production. The inventory costs brought forward from previous year is not added to the current costs. The objective of this method is to value the closing WIP at current costs. Calculate the process cost according to the elements of cost. Add – Units of closing stock completed during the period.

Such stock of finished goods is valued on the basis of the cost per unit as shown by the concerned process account for the relevant periods. There can be abnormal gain also when the actual production is more than the expected production. The quantity as well as the values of these losses can be known through the process costing. For example, for the company that bottles cola, it would not be feasible or worthwhile to separate and record the cost of each bottle of cola in the bottling process. Therefore, the company would assign costs to the bottling process as a whole for a period of time.

Use of Process Costing

Why have three different cost calculation methods for process costing, and why use one version instead of another? The different calculations are required for different cost accounting needs. Alternatively, process costing that is based on standard costs is required for costing systems that usestandard costs.

https://www.bookstime.com/ systems record revenues and costs for batches of identical units of product. When deciding whether to use a job costing or process costing system, we must understand a company’s products and production processes. Often, process costing makes sense if the individual costs or values of each unit are not significant. In this scenario, job order costing is a less efficient accounting method because it costs more to track the costs per eight ounces of iced tea than the cost of a batch of tea.

Financial and Managerial Accounting

In such industries, the production cycle is standardized & even the quantum of the normal loss of inputs & outputs is quantified earlier. In case of abnormal expense, it is a charge to the profit & loss account directly and not to any individual process. Process costing is the only reasonable approach to determining product costs in many industries. It uses most of the same journal entries found in a job costing environment, so there is no need to restructure the chart of accounts to any significant degree. This makes it easy to switch over to a job costing system from a process costing one if the need arises, or to adopt a hybrid approach that uses portions of both systems. Accumulates costs incurred to produce a product according to the processes or departments a product goes through on its way to completion.

Each group has a vice president responsible for several departments. The organizational chart also shows the departments that report to the production department, illustrating the production arrangement. The material storage unit stores the types of wood used , the tips , and packaging materials.