Job Costing Vs. Process Costing: What’s the Difference?

If going into business was cheap, everyone would do it. But the truth is, there is a lot of money being spent before even so much as a dollar is made in return. And to ensure that your business is, in fact, profitable, you have to be able to calculate the total cost that you are spending and weigh it against your revenue. Without a thorough understanding of the cost of doing business in your industry, you may quickly find yourself falling into the red.

Fortunately, there’s not one but two ways of calculating these costs: job costing, and process costing. However, while the end result is largely the same, they are two very different methodologies, and unless you are offering a very wide range of both standardized and custom products, you should only be using one—but which do you choose?

Homogeneous vs. Heterogeneous

On the off chance that you, like many others, haven’t heard terms like homogeneous and heterogeneous since freshman-year chemistry, let’s quickly review: when two things are homogeneous, it means that they are of the same type, or even identical, while two things that are heterogeneous are very different from each other.

This applies to your business and how you would calculate production costs in that some businesses produce homogeneous products en masse (Lego™ blocks, pasta, microchips, candy, smartwatches—the list goes on) while others produce heterogeneous products that are made specifically to order (custom furniture, tailored clothing, et cetera). A business that produces homogeneous products on a large scale would use process costing to determine the amount of money spent on each individual process over a particular period, while those dealing in unique, heterogeneous wares would use job costing to determine the cost of each individual unit made.

Job Costing: A Closer Look

Let’s return to the example of a company that makes tailored suits on a per-order basis. In this instance, it would be impossible to accurately calculate an absolute cost-per-unit, because each unit is using different amounts of fabric, different types of fabric, and may take more or less time depending on the nature of the work (which is also where a reliable time tracker can come in handy). Client A may be of shorter and slimmer build, but want their suit made from a more luxurious and expensive material, while the taller, bulkier Client B may request a less expensive material. Client C wants a custom monogram added to their order, which adds on additional time to the total order, and therefore costs you more in wages and overhead. There is no standard unit, and so there can be no standard unit cost, and cost must instead be calculated for each individual job—time taken, material costs, overheads, and any other factors that apply to the cost of that job. This is why businesses which produce heterogeneous products are better-suited to job costing as opposed to process costing.

Process Costing: The Large-Scale Approach

Of course, as much as trying to process unique costs and incomparable units is ineffective, so too would attempting to cost each unit individually in a large series of identical products. Instead, each stage of the manufacturing—called a “process”—is costed for the period being examined, with the understanding that the output of Process A becomes the input for Process B, and so on until the final output is ready to be shipped. Processes may include the preparation of raw materials, molding, assembly, painting, dyeing, packaging, and many other steps along the way. At the end of a month (or quarterly), the total cost of each process during that period is tallied, and then is divided by the total output quantity. The cost of each individual process divided by the total number of units gives you the price, per unit, of that process; the total accumulated cost divided by the same number gives you the total manufacturing cost of each unit.

Special Cases

So companies that produce heterogeneous products and services should use job costing, while those producing homogeneous products and services should use process costing—this is a fairly simple guideline to follow. But what, then, do you do when your company doesn’t fall neatly into either category? While rare, this does happen. For example, there is a basic product you produce, and that base is identical in all cases, but clients may order customized features and add-ons. In this case, you would use a hybrid costing system, which applies process costing to the base units and job costing to those additions made on a per-order basis.