Costing systems are an essential part of accounting that help businesses calculate the total cost of their products or services. The two basic types of costing systems are job order costing and process costing.
Job order costing is used by businesses that produce custom products or services. The cost of each job is tracked separately, and the total cost of materials, labor, and overhead is added up to determine the total cost of the job. This type of costing system is commonly used by businesses such as printing companies, construction contractors, and custom furniture makers.
Process costing is used by businesses that produce standardized products or services, such as food products or chemicals. This type of costing system calculates the cost of each unit produced, rather than the cost of each job. The total cost of materials, labor, and overhead is divided by the total number of units produced to determine the cost per unit. This cost per unit is used to set prices for the products or services.
Both job order costing and process costing have their advantages and disadvantages. Job order costing allows for more accurate tracking of costs for each job, which is important for businesses that produce custom products or services. However, it can be more time-consuming and complex to track costs for each job. Process costing, on the other hand, is easier to use for businesses that produce standardized products or services. However, it may not be as accurate for businesses that have varying production processes.
In conclusion, understanding the two basic types of costing systems, job order costing and process costing, is crucial for businesses to determine the cost of their products or services. Choosing the right costing system can help businesses accurately track their costs and set appropriate prices for their products or services.