When Job Order Costing Systems Is More Appropriate Than Process Costing
Process costing systems are typically used when identical units are mass produced. In contrast to process costing systems, job order costing systems are used when units vary significantly from one another. Because of these differences process cost systems have become extremely popular with manufacturers. Many of these companies utilize what is known as activity based costing (ABC). ABC has become popular due to the fact that businesses have grown in complexity, and as a result their need to assign increasingly large indirect costs to the appropriate area or activity, have also increased. Computers have contributed substantially both to the complexity of businesses and to their ability to track costs more closely through systems like activity-based costing (Brimson, 1997).
Traditional Job Order Costing
Traditional job order costing systems have a tendency to assign indirect costs based on something easy to identify (such as direct labor hours). This method to assigning costs can be very inaccurate, as there is not necessarily a relationship between the costs that are being assigned, and the activity they are being assigned to. This can make evaluating costs tricky and inaccurate.
Process Costing
Process costing systems can theoretically be used in almost any industry, because it can be adapted to determine costs at so many different levels. However, process costing systems are more effective in complex companies that are not entirely service-based. Complex companies may see the most benefit from this type of costing because it is most helpful when the costing information is difficult to understand or evaluate. Service industries may not benefit as much from process costing systems as other industries because their costs can be difficult to assign as they may not have an identifiable cause and effect relationship.
References
Brimson, James A. Activity Accounting: An Activity-Based Costing Approach. New York:Wiley, 1997.
Horngren et al. (2008). Introduction to management accounting. Upper Saddle River, NY. Prentice Hall.