process costing and job costing


The description of Process Costing and Job Costing is as follows:


Process costing is that aspect of operation costing which is used to ascertain the cost of the product at each process or stage of manufacture. This method of accounting used in industries where the process of manufacture is divided into two or more processes. The objective is to find out the total cost of the process and the unit cost of the process for each and every process. Usually the industries where process costing used are textile, oil industries, cement, pharmaceutical etc.


“Process costing is that form of operation costing which applies where standardize goods are produced”

Process costing is a method of costing under which all costs are accumulated for each stage of production or process, and the cost per unit of product is ascertained at each stage of production by dividing the cost of each process by the normal output of that process.


Process costing is that aspect of operation costing which is used to ascertain the cost of the product at each process or stage of manufacture, where processes are carried on having one or more of the following features:

CONTINUOUS PROCESS: Production is done having a continuous flow of identical products except where plant and machinery is shut down for repairs, etc.

CLEARLY DEFINED PROCESS: In Process Costing, there is clearly defined process cost centres and the accumulation or all costs (materials, labour and overheads) by the cost centres.

ACCURACY OF RECORDS: The maintenance of accurate records of units and part units produced and cost incurred by each process.

TRANSFER OF MATERIALS:  The finished product of one process becomes the raw materials of the next process or operation and so on until the final product is obtained.

TYPES OF LOSSES:  Avoidable and unavoidable losses usually arise at different stages of manufacture for various reasons. Treatment of normal and abnormal losses or gains is to be studied in this method of costing.

CHECK ON INEFFICIENCY IS POSSIBLE: Sometimes goods are transferred from one process to another process not at cost price but at transfer price just to compare this with the market price and to have a check on the inefficiency and losses occurring in a particular process. Elimination of profit element from stock is to be learnt in this method of costing.

MEASUREMENT OF PRODUCTION AT EVERY STAGE: In order to obtain accurate average costs, it is necessary to measure the production at various stages of manufacture as all the input units may not be converted into finished goods; some may be in progress. Calculation of effective units is to be learnt in this method of costing.

JOINT PRODUCTS OR BY-PRODUCTS: Different products with or without by-products are simultaneously produced at one or more stages or processes of manufacture. The valuation of by-products and apportionment of joint cost before point of separation is an important aspect of this method of costing. In certain industries, by-products may require further processing before they can be sold. A main product of one firm may be a by-product of another firm and in certain circumstances, it may be available in the market at prices which are lower than the cost to the first mentioned firm. It is essential, therefore, that this cost be known so that advantages can be taken of these market conditions.

UNIFORM OUTPUT: Output is uniform and all units are exactly identical during one or more processes. So the cost per unit of production can be ascertained only by averaging the expenditure incurred during a particular period.


The industries in which process costs may be used are many. In fact a process costing system can usually be devised in all industries except where job, batch or unit or operation costing is necessary. In particular, the following are examples of industries where process costing is applied:


Process costing is most often used when manufacturers release identical products. If mass produced televisions have the same parts, manufacturers can assign consistent prices to the products based on how much the products cost to manufacture overall.


Businesses that have multiple departments usually use process costing so that management can assess the costs accumulated by each department. For example, one department can take the raw resources and refine them before turning them into finished parts, another department can assemble the parts and a third department can test the finished product to assess both quality and safety. Materials might need to be shipped from one department to another, which may incur additional costs. When the costs of production go up unexpectedly, process costing can allow management to quickly pinpoint the department responsible for the increased costs and identify the source of the increased cost.


Process costing comes into play when a factory manufactures identical parts. For example, a computer manufacturing plant will create numerous components that are interchangeable among computers of the same model. Process costing allows manufacturers to sell individual parts separately to computer repair shops or individual buyers, since the manufacturers know the cost of the separate parts.


Products that have multiple extraneous features can benefit from process costing. Manufacturers can release two versions of the product, with one version costing less but having fewer features and another product costing more but having more features. For example, a manufacturer might release two coffee pots, one with a timer and one without. Process costing lets the manufacturer know how much the timer costs to add to the coffee pot, which enables the manufacturer to gauge how much it must raise the price on the coffee pot with the timer.


Process costs are important in industries that have high innovation. For example, manufacturers cannot determine an appropriate price for a new type of product without knowing how much the product will cost to manufacture overall. In addition, businesses cannot determine if a product will be profitable until they know the overall cost so they can estimate the maximum price that customers will pay for the product.


 1. The majority of items of cost can ordinarily be identified with specific processes and collected and accumulated separately for each period.

 2. Production records of each process are so designed as would show the quantum of production for each period.

 3. The total cost of each process is divided by the total production by the process for arriving at the unit cost of the article processed.

 4. The cost of any normal spoilage or wastage is included in the cost of the total units produced. Thereby the average cost per unit is increased.

 5. As the product travels from one process to another, the cumulative cost thereof in respect of the processes it has already undergone is transferred to the account of the process it has yet to undergo.


 1. Costs are be computed periodically at the end of a particular period

 2. It is simple and involves less clerical work that job costing

 3. It is easy to allocate the expenses to processes in order to have accurate costs.

 4. Use of standard costing systems in very effective in process costing situations.

 5. Process costing helps in preparation of tender, quotations

 6. Since cost data is available for each process, operation and department, good managerial control is



 1. Cost obtained at each process is only historical cost and are not very useful for effective control.

 2. Process costing is based on average cost method, which is not that suitable for performance analysis, evaluation and managerial control.

 3. Work-in-progress is generally done on estimated basis which leads to inaccuracy in total cost calculations.

 4. The computation of average cost is more difficult in those cases where more than one type of products is manufactured and a division of the cost element is necessary.

5. Where different products arise in the same process and common costs are prorated to various costs units. Such individual products costs may be taken as only approximation and hence not reliable.



Materials and supplies as in the case of job costing are issued to each process only against authorized requisitions. At the end of each process or of each costing period, the requisitions are sorted according to processes and their values listed on a material summary sheet. On the basis of this summary sheet, a journal entry is passed to debit the various process accounts and the material control account is credited.


In order to account for labour, the first step is identification of each worker with the process in which he is engaged. If the workers are permanently assigned to the process, such identification would not pose any problem as the pay rolls would be prepared in a manner so as to show the wages cost of each process separately. In that case all that is required is that the pay roll section be notified of permanent transfers of workers from one process to another.

Where it is necessary to frequently transfer workers from one process to another, it may not be possible to have a permanent classification of workers according to processes. In such a case, it is necessary to prepare daily time reports showing the number of employees engaged in each process and, if any worker is required to divide his time among two or more processes, a transfer form would be used to record his times on different processes. At the end of the week or that of the costing period, the daily time reports and transfer forms would be abstracted on a labour summary sheet. On this basis a journal entry would be made, debiting various process accounts and crediting the wages control account.


Since normally it is practicable to identify all materials and labour charges with specific processes, the overhead expenses chargeable to a process ordinarily would not contain cost of indirect materials or labour.

But there still would be several items of expenses that do not relate to any particular process. It would be necessary to apportion them to various processes on suitable bases. Different bases that are generally adopted for making such a distribution are stated below:

Rent, rates and taxes Area occupied by each process.
Power Meter readings or horse power of plant employed for each process.
Fire insurance Value of asset and the degree of risk involved.
Water, gas, steam, etc. Meter readings or technical estimates.
Depreciation of plant Value of assets employed.  

Amounts of manufacturing overheads are, usually debited in totals to a total overhead account entitled ‘Manufacturing Overhead Control Account’. From this account, the total amount is distributed to various process accounts on the basis of a manufacturing overhead summary sheet. The summary sheet contains a description of various items of manufacturing overheads and the manner in which the same has been distributed, i.e. one or other based mentioned above.

An alternative method of distributing the manufacturing overhead that could be followed is to apportion the total of the overhead expenses in a lump sum to the process on a blanket base, such as the number of units processed or total labour or operating hours of each process for the period. Such a lump sum distribution is generally unscientific since the figures are not analytically obtained.


For each process an individual process account is prepared. Each process of production is treated as a distinct cost centre.

Items on the Debit side of Process Account

In process Costing, individual process Accounts are prepared for each process. Each process account is debited with-

(a) Cost of materials used in that process.

(b) Cost of labour incurred in that process.

(c) Direct expenses incurred in that process.

(d) Overheads charged to that process on some pre determined.

(e) Cost of ratification of normal defectives.

(f) Cost of abnormal gain (if any arises in that process)

Items on the Credit side of Process Account

Each process account is credited with-

 (a) Scrap value of Normal Loss (if any) occurs in that process.

 (b) Cost of Abnormal Loss (if any occurs in that process)



The cost of the output of the process (Total Cost less Sales value of scrap) is transferred to the next process. The cost of each process is thus made up to cost brought forward from the previous process and net cost of material, labour and overhead added in that process after reducing the sales value of scrap. The net cost of the finished process is transferred to the finished goods account. The net cost is divided by the number of units produced to determine the average cost per unit in that process.


In manufacturing processes, entire input is not getting converted into output. A certain part of input is lost while processing which is inevitable. Certain production techniques are of such a nature that some loss is inherent to the production. Wastages of material, evaporation of material are un- avoidable in some process. But sometimes the Losses are also occurring due to negligence of Labourer, poor quality raw material, poor technology etc. These are normally called as avoidable losses. Basically process losses are classified into two categories (a) Normal Loss (b) Abnormal Loss

  • Normal Loss:

Normal loss is an unavoidable loss which occurs due to the inherent nature of the materials and production process under normal conditions. It is normally estimated on the basis of past experience of the industry. It may be in the form of normal wastage, normal scrap, normal spoilage, and normal defectiveness. If the normal loss units can be sold as a scrap then the sale value is credited with process account. If some rectification is required before the sale of the normal loss, then the cost of rectification is debited in the process account. The cost per unit of a process is calculated after adjusting the normal loss. In case of Normal Loss the cost per unit is calculated by the under given formulae.

Cost of Good Unit = (Total Cost-Sale value of Scrap/ Input Normal- Loss Units)

  • Abnormal Loss:

Any loss caused by unexpected abnormal conditions such as plant breakdown, substandard material, carelessness, accident etc. such losses are in excess of pre-determined normal losses. This loss is basically avoidable. Thus abnormal losses arrive when actual losses are more than expected losses. Abnormal losses in calculated as per under given formulae:

Value of Abnormal Loss = (Total Cost-Sale value of Scrap/ Input Normal- Loss Units) ×  Units in abnormal loss

Abnormal Process loss should not be allowed to affect the cost of production as it is caused by abnormal (or) unexpected conditions. Such loss representing the cost of materials, labour and overhead charges called abnormal loss account. The sales value of the abnormal loss is credited to Abnormal Loss Account and the balance is written off to costing P & L A/c.


To Process A/c     By Bank Account    
      By Costing Profit and Loss Account    


The margin allowed for normal loss is an estimate (i.e. on the basis of expectation in process industries in normal conditions) and slight differences are bound to occur between the actual output of a process and that anticipates. This difference may be positive or negative. If it is negative it is called ad abnormal Loss and if it is positive it is Abnormal gain i.e. if the actual loss is less than the normal loss then it is called as abnormal gain. The value of the abnormal gain calculated in the similar manner of abnormal loss. The formula used for abnormal gain is:

Value of Abnormal Gain = (Normal cost of normal output x Units of Abnormal gain)/ Normal output

Normal cost of normal output = Total expenditure– Sale Proceeds of scrap

Normal output = Input – Units of normal loss

Units of Abnormal gain = Normal loss- Actual loss

Or = Actual output – Normal output

The sales values of abnormal gain units are transferred to Normal Loss Account since it arrive out of the savings of Normal Loss. The difference is transferred to Costing P & L A/c. as a Real gain.


To Normal Loss A/c     By Process Account    
To Costing Profit and Loss Account          


This represents the production of a process in terms of completed units. In other words it means converting the incomplete production units into its equivalent of complete units. In each process an estimate is made of the percentage completion of any work-in-progress. A production schedule and a cost schedule will then be prepared. The work-in-progress is inspected and an estimate is made of the degree of completion, usually on a percentage basis. It is most important that this estimate is as accurate as possible because a mistake at this stage would affects the stock valuation used in the preparation of final accounts.


Job costing or job order costing also called specific order costing is a method of costing which is used when work is undertaken as per the customer’s special requirement (tailor-made).


“Job costing is that form of specific order costing which applies where work is undertaken to customer’s specific requirements and each order is of comparatively of short duration.”

Under this method of costing, each job is considered to be a distinct cost unit. As such, each job is separately identifiable. In the case of a job, work is usually carried out within the factory or workshop. Sometimes, a job is accomplished even in the customer’s premises.

Job costing is employed in the following cases:

  • Where the production is against the order of the customer or jobs are executed for different customers according to their specifications.
  • Where each job needs special treatment and no two orders are necessarily alike.
  • Where there is no uniformity in the flow of production from one department to another.
  • Where the work-in-progress differs from period to period on the basis of the number of jobs in hand.

Job costing is applicable to printing, furniture, hardware, ship-building, heavy machinery, foundry general engineering works, machine tools, interior decoration, repairs and other similar work.


1. Each job has its own characteristics, depending up on the special order placed by the customer.

2. Each job is treated as a cost unit.

3. A separate job cost sheet is made out for each job on the basis of distinguishing numbers.

4. A separate work in progress ledger is maintained for each job.

5. The duration of the job is normally a short period.

6. Profit or loss is determined for each job independently of others.


The following are the advantages of Job costing:


It helps management to detect which jobs are profitable and which are not. Estimates of cost for similar work in the future may be conveniently made on the basis of accurate record of job costs. This assists in the prompt furnishing of price quotations for specific jobs.


The cost of materials, labour and overhead for every job or product in a department is available regularly and periodically, enabling the management to know the trend of cost and thus by suitable comparison, to control the efficiency of operations, materials and machines.


The adoption of predetermined overhead rates in job costing necessitates the application of a system of budgetary control of overheads with all the advantages.


Spoilage and defective work can be easily identified with specific jobs or products so that responsibility may be fixed on departments or individuals.


Job costing is particularly suitable for cost plus and such other contracts where selling price is determined directly on the basis of costs.


The cost of material, labour and overhead for every job or product in a department is available daily, weekly or as often as required while the job is still in progress.


On completion of a job, the cost under each element is immediately ascertained. Costs may be compared with the selling prices of the products in order to determine their profitability and to decide which product lines should be pushed or discontinued.


Historical costs for past periods for each product, compiled by orders, departments, or machines, provide useful statistics for future production planning and for estimating the costs of similar jobs to be taken up in future. This assists in the prompt furnishing of price quotations for specific jobs.


 The actual overhead costs are compared with the overhead applied at predetermined rates; thus, at the end of an accounting period, overhead variances can be analyzed.


Job costing serves the following objectives :

1. It helps in finding out the cost of production of every order and thus helps in ascertaining profit or loss made out on its execution. The management can judge the profitability of each job and decide its future course of action.

2. It helps management in making more accurate estimates about the costs of similar jobs to be executed in future on the basis of past records. The management can conveniently and accurately determine and quote prices for orders of a similar nature which are in prospect.

3. It enables management to control operational inefficiency by comparing actual costs with the estimated ones.


  • A sound system of production control
  • An effective time booking system
  • Clearly defined cost centre
  • Appropriate overhead absorption rate, and
  • Proper material issue pricing method.


The following is the procedure adopted for costing purposes in a concern using job costing:

  1. Job Number:

When an order has been accepted, an individual work order number must be assigned to each such job so that separate orders are capable of being identified at all stages of production. Assignment of job numbers also facilities reference for costing purposes in the ledger and is conveniently short for use on various forms and documents.

  • Production order:

The Production Control Department then makes out a production order thereby authorising to start work on the job. Several copies of production order are prepared, the copies often being in different colours to distinguish them more easily. These copies are passed on to the following:

(i) All departmental foremen concerned with the job;

(ii) Storekeeper for issuance of materials; and

(iii) Tool room-an advance notification of tools required.

The columns provided in the production order differ widely, depending largely upon the nature of production.

  • Job Cost Sheet:

Job cost sheet is the most important document used in the job costing system. A separate cost sheet or card is maintained for each job in which all expenses regarding materials, labour and overheads are recorded directly from costing records. Job cost sheets are not prepared for specific periods but they are made out for each job regardless of the time taken for its completion. However, material, labour and overhead costs are posted periodically to the relevant cost sheet. Costs for various jobs are collected on the following basis :

(a) Cost of materials: Materials requisition slips, bills of materials or materials issue analysis sheet.

(b) Cost of wages: Job cards, labour cost cards or wages analysis sheet.

(c) Direct expenses: Direct expense vouchers.

(d) Overheads: Overheads may be charged to each job on the basis of any of the methods of overhead absorption.

  • Completion Report:

A completion report is sent to the costing department after the completion of job. The actual cost recorded in the job cost sheet is compared with the estimated cost. It will reveal the efficiency or inefficiency in operation. It is a guide to the future course of action.

  • Profit or Loss:

Profit or loss on each job can be determined by comparing the actual cost with the price obtained.


Job costing suffers from certain limitations. These are as follows.

  • It is said that it is too time consuming and requires detailed record keeping.
  • Record keeping for different jobs may prove complicated.
  • Inefficiencies of the organization may be charged to a job though it may not be responsible for the same.
  • Job costing is comparatively more expensive as more clerical work is involved in identifying each element of cost with specific departments and jobs.
  • With the increase in the clerical processes, chances of errors are enhanced.
  • The cost as ascertained, even where they are compiled very promptly, are historical as they are compiled after incidence.
  • The cost compiled under job costing system represents the cost incurred under actual conditions of operation. The system does not have any scientific basis.


MEANING Job costing refers to calculating the cost of a special contract, work order where work is performed as per client’s or customer’s instructions. A costing method, in which the costs which are charged to various processes and operations is ascertained, is known as Process Costing.
NATURE Job Costing involves Customized production. Process Costing involves Standardized production.
ASSIGNMENT OF COST The cost of each job is calculated separately. First of all, cost is determined for the process, thereafter spread over the produced units.
COST CENTER Job is the cost centre in job costing. Process is the cost center in process costing.
CONTROL As each product unit is different and production is not continuous, proper control is comparatively difficult. As the production is standardized and stable, control is comparatively easier.
SCOPE OF COST REDUCTION The scope of cost reduction in job costing is less. The scope of cost reduction in job costing is high.
TRANSFER OF COST No transfer of cost is made from one job to another job. Cost is transferred from one process to another.
IDENTITY Each job is different from another. Products are manufactured consecutively and so they lose their identity.
COST ASCERTAINMENT The cost is ascertained after the Completion of the job. The cost is ascertained at the End of the cost period.
INDUSTRY TYPE Job costing is suitable for the industries which manufactures products as per customer’s order Process costing is perfect for the industry where mass production is done.
LOSSES Losses are usually not segregated. Normal losses are carefully ascertained and abnormal losses are bifurcated.
WORK-IN-PROGRESS (WIP) WIP may or may not exist at the beginning or at the end of the financial year. WIP will always be present in the beginning or at the end of the accounting period.
SIZE OF JOB Used for small production units. Used for large production units.
RECORD KEEPING The record keeping is Tedious task in job costing. The record keeping is an Efficient task in process costing.


There is no comparison between Job Costing and Process Costing because both the methods are used in different industries. Although, the differences exist in the two methods. One such difference is, each job requires a high degree of supervision and control, but the process does not require so, as they are standardized in nature.



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