One question decides the right system: can a unit of output be distinguished from the others and its costs traced on its own? If yes, it is job order costing; if no, it is process costing.
1 The two systems compared
| Job order costing | Process costing | |
|---|---|---|
| Nature of production | Distinct products made to order | Continuous standardised output |
| Unit of accumulation | The job or project | The process or production department |
| Cost calculation | Job cost ÷ its units | Process costs ÷ equivalent units |
| Examples | Contracting · printing · made-to-order furniture · maintenance | Cement · petrochemicals · food · beverages |
| Core document | The job cost card | The production cost report for the process |
2 Job order costing in practice
Each job has a cost card on which materials, labour and manufacturing overhead accumulate until it is complete. When it is finished the job’s cost is divided over its units.
Job A-142: manufacturing 50 office furniture units to a customer’s specification.
| Item | Detail | Amount |
|---|---|---|
| Direct materials | Per material requisitions | 62,000 |
| Direct labour | 400 hours × 55 | 22,000 |
| Overhead absorbed | 400 hours × 40 | 16,000 |
| Total job cost | — | 100,000 |
| Cost per unit | 100,000 ÷ 50 | 2,000 |
The benefit: when pricing a similar job later you have a real basis rather than an impression. And when profit on a job goes astray, you know which line caused it.
3 Process costing and equivalent units
In continuous production some units remain incomplete at the end of the period. They cannot be treated as complete units nor ignored, so they are converted into equivalent units according to their degree of completion.
Completed units
Finished and transferred out of the process
Work in progress
Partly complete
Equivalent units
Completed + (partial × degree of completion)
Cost per unit
Process costs ÷ equivalent units
400 units that are 50% complete = 200 equivalent units in terms of resources consumed
During the month 8,000 units were completed and 2,000 units remained in progress, 50% complete as to conversion costs, with materials added in full at the start of the process.
| Item | Materials | Conversion costs |
|---|---|---|
| Completed units | 8,000 | 8,000 |
| Work in progress | 2,000 (100%) | 1,000 (50%) |
| Equivalent units | 10,000 | 9,000 |
| Costs | 300,000 | 180,000 |
| Cost per unit | 30 | 20 |
Cost of a completed unit = 30 + 20 = SAR 50, and the cost of work in progress = (2,000 × 30) + (1,000 × 20) = SAR 80,000.
Note that materials and conversion have two different counts of equivalent units, because their degrees of completion differ — the mistake beginners make most often.
Hybrid systems
Many businesses use a mix: standardised output under process costing with customer-specific customisation in the final stage under job costing. The system serves reality, not the other way round.
A common error
Charging one job’s costs to another because materials were issued without a specific requisition. Once jobs blur together the cost cards lose their meaning, and the profitability of each job becomes a number nobody can rely on.
Lesson summary
- Job costing suits distinct products; process costing suits continuous standardised output.
- The job cost card accumulates materials, labour and overhead until completion.
- Equivalent units convert incomplete output into its equivalent in completed units.
- Materials and conversion costs may have different equivalent unit counts.
- Hybrid systems are common; the test is fit with reality, not purity of the model.
4 Test yourself
Three quick questions
Choose the answer you think is correct — the result appears immediately.
1. A contracting company carries out different projects for different clients. Which system?
Each project is distinct and separately traceable, so its costs are gathered on a card of its own.
2. 3,000 units are 40% complete. How many completed units is that equivalent to?
3,000 × 40% = 1,200 equivalent units in terms of resources consumed.
3. Why do equivalent units differ between materials and conversion costs?
A unit may have 100% of its materials while being only 50% complete in processing terms.