What are the differences between job-cost and process-cost systems? When would it be appropriate to use each type of system? How does each system affect the cost of a product?
When it comes to costing systems, there are two primary methods used in business: job-cost and process-cost systems. Let's explore the differences between these systems, when it's appropriate to use each one, and how they affect the cost of a product.
1. Job-cost system:
- In a job-cost system, costs are assigned to each individual job or project. It is used in industries where customized or unique products or services are offered.
- Costs are tracked by specific units such as a project, contract, or customer order. This allows for the identification of direct costs (direct materials, direct labor) and indirect costs (overhead) associated with each job.
- Job-costing is most appropriate for industries like construction, advertising, consulting, or custom manufacturing where every job is unique and requires tracking individual costs.
- Job-cost systems provide a detailed view of costs, making it easier to accurately assess profitability on a job-by-job basis.
2. Process-cost system:
- In a process-cost system, costs are accumulated by department or process rather than by individual job. It is used when products or services are produced in large quantities or are standardized.
- Costs are averaged over a period and then allocated uniformly across all the units produced during that period. This allows for the identification of direct costs and the allocation of indirect costs to all units produced in a given period.
- Process-costing is most appropriate for industries like food processing, oil refining, chemical manufacturing, or mass-produced consumer goods where products go through multiple processes and are produced in large volumes.
- Process-cost systems provide a macro-level view of costs, allowing for a more simplified approach to cost allocation and costing decisions.
3. Effect on product cost:
- In a job-cost system, each job has its own unique costs assigned to it. As a result, the cost of each product can vary based on the specific requirements of the job. This system provides more accuracy in determining the cost of a custom product or service.
- In a process-cost system, costs are averaged and spread across all units produced. This leads to a more standardized cost per unit, irrespective of customizations or specific job requirements. This system is efficient for mass production or standardized products.
In summary, the choice between job-cost and process-cost systems depends on the nature of the industry and the specific needs of the organization. Job-cost systems are suitable for industries with unique or customized products, providing detailed cost information on a job-by-job basis. Process-cost systems are preferable for industries with standardized or mass-produced products, offering a simplified approach to cost allocation and averaging costs across all units.