Job Costing vs. Process Costing: What is the Difference?

There are two types of cost accounting in the business world: Job Costing and Process Costing.

Job costing is a way to track costs for each product or service you provide. It's also known as "product costing." This type of accounting documents how much your company will need to budget to produce one unit of a particular product.

Process costing is different from job costing because it tracks all the steps involved in producing a single item. For example, if you sell widgets, you would use process costing to determine what it takes to make a widget. You might find out that it costs $1.00 to make a widget, but then you may discover that it costs more than that because you must pay someone else to do some of the work.

Additionally, the difference between job costing and process costing depends on whether you are doing the accounting for one project or for many projects over some time. If you are doing it for one project, you must do both types of costing because there can be no comparison between them. However, you can compare the two methods if you are doing it for multiple projects over several months or even years.

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The success or failure of any construction job hinges on profit. Profit margins are razor-thin in construction. Job costing helps you project job expenses to identify problems before they affect yield. Can work be completed with the money and budget available? What are the risk factors on the Job? What do you need to do to succeed?

With job costing, you can accurately predict, record, and control the cost of each Job. Your materials, labor, subcontractors, and equipment expenses are tracked and monitored during the job lifecycle. You can see where the money is going for construction work to predict future costs more accurately.

Since job costing is critically important, you should implement construction accounting software that supports it. You will not have an accurate, robust job-costing system with spreadsheets or standard accounting software. Your risk will also increase because you don't have a purpose-built tool to manage your costs. But a construction-based software system brings all job-costing functions together, so everything is integrated. 

Process costing is a method of cost accounting that focuses on the production or manufacturing processes and how an organization performs them. It is also known as activity-based costing (ABC) or work measurement system (WMS). The term "process" refers to any step in the production or manufacturing process.

This process encompasses all activities involved in producing goods or services for sale, including planning, organizing, scheduling, executing, controlling, monitoring, evaluating, and closing. In contrast with job costing, which measures costs based on individual jobs, process costing measures costs based on each unit of output produced. 

Types of Process costing

There are three main types of process costing: standard cost accounting, average cost accounting, and first-in, first-out (FIFO). Each method offers a slightly different perspective on the cost of producing a product.

• Standard Cost Accounting: This method of process costing is typically used for simple products that do not vary much in size or complexity. This method allows you to calculate the total costs incurred before and after production if there are enough records to reflect those costs accurately.
• Average Cost Accounting: With average cost accounting, you assign a value to individual production units based on the average cost of making that item. 
• First-In, First-Out (FIFO): The FIFO method of process costing is often used to calculate the cost of manufacturing items that change frequently or are challenging to measure. With FIFO, you start tracking the actual costs of production as soon as the work begins. When a finished product is ready, you stop tracking the costs associated with making that product and begin monitoring the next production batch. As soon as the next set starts, you stop tracking the previous batch's expenses and start tracking the costs of making the new batch.

Job costing is each job carried out during an assignment or project. Process costing is the total cost of the operations carried out in the complete project. Knowing the differences is key to implementing the best cost reporting.

The above points help us understand how job and process costing differ. Job costing is based on the production cost per unit, while process costing is based on the total cost incurred during the product's entire life cycle. This is because process costing includes all costs associated with producing the item, including raw material purchase, manufacturing, distribution, etc.

Job costing is less complex and easier to use compared to process costing. On the contrary, process costing provides detailed information about each activity involved in the production process.

In addition, job costing is suitable for small businesses, while process costing is ideal for larger companies. Also, it is possible to combine both types of costs.

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Deltek ComputerEase is the leading construction software for job costing accounting, project management, and payroll services—delivering solutions that help customers connect and automate the project lifecycle that fuels their business. Deltek’s dedicated team is committed to providing service excellence and product innovation, adapting to the evolving construction compliance requirements.

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