Job-Order and Process Costing

Quick Answer: Job-order costing assigns costs to specific jobs/batches for custom products. Process costing averages costs across equivalent units for mass production. FIFO separates beginning inventory from current costs; weighted average combines them. Equivalent units convert partial work into full-unit equivalents.

The choice between job-order and process costing depends on the nature of production. Custom products use job costing; homogeneous mass production uses process costing.

Job-Order Costing System

Job-order costing is used when products are distinct and identifiable—each job can be separately tracked.

When to Use Job-Order Costing

Job Cost Sheet

Each job has a job cost sheet that accumulates:

Predetermined Overhead Rate (POHR)

Since actual overhead isn't known until period-end, manufacturers use a predetermined overhead rate calculated at the beginning of the year:

Formula:

POHR = Estimated Total MOH ÷ Estimated Total Allocation Base

Common Allocation Bases:

• Direct labor hours
• Direct labor cost
• Machine hours
• Direct materials cost

Example:

Estimated MOH = \$500,000
Estimated DL Hours = 25,000 hours
POHR = \$500,000 ÷ 25,000 = \$20 per DL hour

Applied vs. Actual Overhead

Disposing of Over/Underapplied Overhead:

1. Close to COGS (most common, if immaterial)
2. Prorate to WIP, FG, and COGS (if material)

Job Costing Example

Process Costing System

Process costing is used for homogeneous, mass-produced products where individual units are indistinguishable.

When to Use Process Costing

Key Concepts in Process Costing

Equivalent Units (EU): Convert partially completed units to the equivalent number of completed units.

Equivalent Units = Physical Units × Percentage Complete

Example: 1,000 units that are 40% complete = 400 equivalent units

Process Costing Methods

Weighted Average Method

The weighted average method combines beginning WIP costs with current period costs.

Steps for Weighted Average:

Step 1: Physical Flow of Units

Units to Account For = Beginning WIP + Units Started
Units Accounted For = Units Completed + Ending WIP

Step 2: Calculate Equivalent Units

EU = Units Completed + (Ending WIP × % Complete)

Step 3: Calculate Cost per Equivalent Unit

Cost per EU = (Beginning WIP Cost + Current Period Cost) ÷ Total EU

Step 4: Assign Costs

Cost of Completed Units = Units Completed × Cost per EU
Cost of Ending WIP = EU in Ending WIP × Cost per EU

Weighted Average Example

Equivalent Units (Weighted Average):

Cost per Equivalent Unit:

Materials: (\$10,000 + \$40,000) ÷ 10,000 = \$5.00 per EU
Conversion: (\$6,000 + \$54,000) ÷ 8,200 = \$7.317 per EU

FIFO Method

FIFO separates beginning WIP costs from current period costs, providing more accurate current-period cost information.

Steps for FIFO:

Step 1: Physical Flow (same as weighted average)

Step 2: Calculate Equivalent Units

EU = Work to complete Beginning WIP + Units Started and Completed + Ending WIP

Step 3: Calculate Cost per EU (current period only)

Cost per EU = Current Period Costs ÷ FIFO Equivalent Units

Step 4: Assign Costs

• Beginning WIP costs flow out first
• Current costs applied to remaining work

FIFO Example (Same Data)

Equivalent Units (FIFO):

Cost per Equivalent Unit (Current Period Only):

Materials: \$40,000 ÷ 8,000 = \$5.00 per EU
Conversion: \$54,000 ÷ 7,000 = \$7.714 per EU

Cost Reconciliation

A cost reconciliation verifies that total costs to account for equal total costs accounted for:

Costs to Account For = Beginning WIP + Current Period Costs
Costs Accounted For = Completed Units + Ending WIP

These amounts must balance—this is a critical check in process costing.

Comparing Job-Order and Process Costing