Job-Costing and Process-Costing Systems

Learning Objective 2 Distinguish job costing from process costing

Management accountants use two basic types of costing systems to assign costs to products or services.

  1. JOB-COSTING SYSTEM. In a job-costing system, the cost object is a unit or multiple units of a distinct product or service called a job. Each job generally uses different amounts of resources. The product or service is often a single unit, such as a specialized machine made at Hitachi, a construction project managed by Bechtel Corporation, a heart transplant surgery performed at the Mayo Clinic, or an advertising campaign produced by Saatchi & Saatchi. Each special machine made by Hitachi is unique and distinct from the other machines made at the plant. An advertising campaign for one client at Saatchi & Saatchi is unique and distinct from advertising campaigns for other clients. Because the products and services are distinct, job-costing systems are used to accumulate costs separately for each product or service.
  1. PROCESS-COSTING SYSTEM. In a process-costing system, the cost object is masses of identical or similar units of a product or service. For example, Citibank provides the same service to all its customers when processing customer deposits. Intel provides the same product (say, a Core i9 chip) to each of its customers. All Minute Maid consumers receive the same frozen orange juice product. In each period, process-costing systems divide the total costs of producing an identical or similar product or service by the total number of units produced to obtain a per-unit cost. This per-unit cost is the average unit cost that applies to each of the identical or similar units produced in that period.

Exhibit 4-1 presents examples of job costing and process costing in the service, merchandising, and manufacturing sectors. These two types of costing systems lie at opposite ends of a continuum; in between, one type of system can blur into the other to some degree.

Flow diagram shows job-costing and process-costing on the two ends of a continuum. Job-costing system includes distinct units of a product or service and process-costing system includes masses of identical or similar units of a product or service.

Exhibit 4-1

Examples of Job Costing and Process Costing in the Service, Merchandising, and Manufacturing Sectors

Table shows the various examples of job costing and process costing in the service, merchandising, and manufacturing sectors.

The various examples of job costing and process costing in the three different sectors are as follows:

  1. Job Costing

    1. The examples of job costing used in the service sector are:

      • Audit engagements done by PricewaterhouseCoopers

      • Consulting engagements done by McKinsey & Co.

      • Advertising-agency campaigns run by Ogilvy & Mather

      • Legal cases argued by Hale & Dorr

      • Movies produced by Netflix

    2. The examples of job costing used in the merchandising sector are:

      • The Home Depot delivering individual appliances ordered online

      • Special promotion of new products by Walmart

    3. The examples of job costing used in the manufacturing sector are:

      • Assembly of individual aircrafts at Boeing

      • Construction of ships at Litton Industries

  2. Process Costing

    1. The examples of process costing used in the service sector are:

      • Bank-check clearing at Bank of America

      • Standard physical therapy session at ATI Physical Therapy

    2. The examples of process costing used in the merchandising sector are:

      • Grain dealing by Arthur Daniel Midlands

      • Lumber dealing by Weyerhauser

    3. The examples of process costing used in the manufacturing sector are:

      • Oil refining by Shell Oil

      • Beverage production by PepsiCo

Many companies have costing systems that are neither pure job-costing systems nor pure process-costing systems but—instead—have elements of both, tailored to the underlying operations. For example, Kellogg Corporation uses job costing to calculate the total cost to manufacture each of its different and distinct types of products—such as Corn Flakes, Crispix, and Froot Loops—and process costing to calculate the per-unit cost of producing each identical box of Corn Flakes, each identical box of Crispix, and so on. In this chapter, we focus on job-costing systems. Chapters 18 and 19 discuss process-costing systems.