In a job costing system, costs are assigned directly to each project. For instance, American Tugs, which builds custom yachts based on a tugboat mold, tracks direct costs for each project and allocates overhead so that each item manufactured also has a “cost card” that has every direct and indirect cost recorded. When the boat is sold, management can tell exactly how much money the company made or lost on that unique product.
However, many businesses produce large quantities of a single product or similar products. Pepsi-Cola makes soft drinks, Exxon Mobil produces oil, and Kellogg Company produces breakfast cereals on a continuous basis over long periods. For these kinds of products, companies do not have separate jobs. Instead, production is an ongoing process. In these types of operations, accountants must accumulate costs for each process or department involved in making the product and then somehow assign those costs to the products.
Here is a short comparison of job order costing and process costing:
You can view the transcript for “Job Order Costing vs Process Costing” here (opens in new window).
A process cost system (process costing) accumulates costs incurred to produce a product according to the processes or departments it goes through on its way to completion, then those costs are allocated to the finished goods in some logical manner. This is what you will learn to do in this module.