Job costing and process costing are necessary accounting systems businesses use to calculate costs to maintain their profit margin. There are a lot of costs associated with running a small business— even some seemingly hidden ones that can take you by surprise if you’re not diligent with your bookkeeping.
There are three accounting systems that your business can use to keep track of important financial information:
- Job costing
- Process costing
- A hybrid system combining the latter two
With these systems in place, you can easily keep track of your business’ production cost, cash flow, and other important financial data.
You may be wondering though, which cost system should your small business use?
Whether your business offers a wide range of products or is just getting its feet off the ground, tracking your costs efficiently is critical for your business’s short-term profit margin and long-term success.
What is Job Costing?
The job costing system, also known as job order costing, keeps track of costs on a project-by-project basis. Job costing focuses on creating estimates based on an accumulation of production costs for each individual job. Each specific job cost can vary depending on a variety of factors, including:
- Time spent on the job
- Any materials required to complete the job
- Labor cost for any employees on the project
This activity-based costing requires you to track the cost specifics of each individual job. This method of tracking costs allows your business to personalize estimates for jobs that require custom services. Job costing enables you to track the expenses for a job and compare expenses to your revenue to ensure your business is making a profit.
Let’s look at an example. Perhaps you run a plumbing business and decide to make a house call.
As a plumber, you will charge for the amount of time you spent on the job, labor costs, and the cost of any parts needed to finish the repair. You may also charge an additional fee for extra services rendered, or whether or not they need to take additional steps to finish the job, such as snaking a drain or clearing an obstruction.
Typically, each aspect of a job has an associated fee structure, allowing you to create an estimated cost for each job before you begin. However, this is subject to change if a job requires less— or more— time, materials, or labor to complete.
What is Process Costing?
In contrast to job costing— which accounts for costs on a job-by-job basis— the process costing system accounts for services or products that share similar or identical costs, such as goods sold.
This product cost should also account for materials and labor costs that go toward the finished goods.
As another example, perhaps you are a baker.
Each day, you likely need to bake dozens of cookies, cupcakes, and other sweet treats. You’re likely baking different varieties of each— chocolate cupcakes and vanilla cupcakes, sugar cookies and chocolate chip cookies, et cetera. This, of course, requires different ingredients, which affect the overhead cost. However, you’re still baking large batches of identical products to sell, and your overhead remains the same for each product produced.
Rather than calculating the cost of a product or service on an individual basis, this process is ideal for pricing batches of identical or equivalent units just once, creating a flat rate for the product or service rendered by your business.
Process costing requires far less intricate record-keeping than job costing and is generally used for large production runs that do not require custom products or services.
Related: What is Landed Cost?
What Is Hybrid Costing?
As the name implies, hybrid costing is a cost accounting system that utilizes both job and process costing features. Hybrid costing is used by companies that produce identical goods and services but also offer customizable products.
For example, imagine that you operate an eCommerce shop that manufactures and sells backpacks with an option to customize orders individually.
In this situation, you would use process costing to account for the mass production of your inventory. If a customer would like to have their name embroidered on their bag, you would use a job costing system to account for any additional time, labor, and material needed to complete the job.
Job Costing or Process Costing? Which You Should Choose
Both processes are vital when it comes to tracking and calculating expenses like labor, materials, time, and overhead.
If your small business creates and sells identical products or services, then process costing is the way to go. However, if your business operates on a project-by-project basis, then the job costing system will be more effective. Of course, the hybrid costing system is ideal if your business offers identical products that are customizable.
It can be complicated to keep track of all of the assorted costs that come with running a business, but the right resources can make organizing your business’ finances much easier. Accounting software like QuickBooks can make tracking your costs and providing estimates an easy feat, so long as it is set up properly!
Need Help Keeping Your Business’ Finances in Order? Trust MISSION Accounting
Financial accounting can take a lot of time and attention to detail for any small business. But you don’t have to keep track of your business’ finances without help.
Bernard Roesch, MISSION Accounting’s founder, is a Harvard MBA and a QuickBooks ProAdvisor. He has over 25 years of experience in advising his clients and helping them make smart and profitable business decisions. He and his team of QuickBooks experts can also help you choose the right QuickBooks version for your small business and help you make the most of QuickBooks to help your business thrive.
Contact us at Mission Accounting today to schedule a complimentary consultation for your bookkeeping needs. We’re here to help you find solutions to all your business’s financial needs and make running your small business easier.