If you couldn’t keep your eyes open in managerial accounting class (or were never provided with the immense bounty of experiencing firsthand the magical adventure that is managerial accounting class), you might not remember that there are two different ways of looking at the costs associated with the work your business does: one that focuses on process, and another that focuses on jobs. Both have their place.
This is an introduction to what they are and how they can help your business look at its data in a way that makes sense and helps you to learn and grow.
What is process costing?
Process costing is a method of assigning both direct and indirect costs to one particular income-producing process, typically the manufacture of a product. If your business makes and sells lunchboxes, for example, you might assign all the costs associated with the process of designing, manufacturing, marketing, and shipping lunchboxes. This might include labor, equipment, utilities, raw materials, and shipping costs, for example.
Since one lunchbox is much like another, you can average out the costs rather than calculating the cost of each individual lunchbox. Sure, Joe works on some lunchboxes and Janice works on others, but even though they earn different hourly rates because Joe has more seniority, you can still calculate the average labor cost per lunchbox with some very simple math.
With process costing, you’re easily able to look at the cost of manufacturing lunchboxes vs. thermoses. Combined with information on lunchbox and thermos sales over the same period of time, you have a powerful data set that can help guide your business decisions in the future.
What is job costing?
Job costing comes from a different set of assumptions and organizes similar raw data in a very different way. In job costing, direct and indirect costs are assigned to all processes involved in one particular job. Instead of lunchboxes, suppose your business builds custom houses. Each house has a lot of processes that go into it, and no two house-building jobs are exactly the same.
While two different houses might include the costs of an architect, construction equipment, concrete, lumber, protective equipment, general and skilled laborers, etc, one house is a tiny ranch built on a slab in a nearby inner-ring suburb, while another is a sprawling plantation-style home with a four car garage on the side of a mountain.
In this case, there’s little useful information to be found in averaging out the labor and materials costs of these homes. On the other hand, you could learn a lot about comparing the total costs of each one. When the next job comes up (perhaps a home that’s somewhere between these two extremes), you’ll be able to make more accurate estimates based on the data from past jobs.
Isn’t this all the same information rearranged? Why not just do both?
Some businesses do! While process costing works better when the products are all identical or similar and job costing makes more sense when each product is unique, there are usually some processes in common between products and often some variation from one product to another. But the type of costing you choose to look at will impact how you collect that information.
Take labor as an example. When your employee clocks in, what do you ask her to track? If she’s a painter, maybe you ask her to check “painting,” so that you know what part of the process the cost of her work should be allocated to. Or if she’s working on the new library building, you might ask her to note “library” when she clocks in, so that you know what job she’s a part of.
You can ask for both if you want, but you’ll need to make sure your timekeeping and attendance system is equipped to handle both sets of data. And that you (or your data person) know how to organize that information once you have it in hand.
We think about things like timekeeping as a tool for HR, but it also provides a wealth of information.
What you get out of it it depends largely on the thought you put into it.
Looking for more information about timekeeping and attendance? Get your free copy of the Timekeeping Compliance Checklist to begin.
If you're a small business owner or HR Manager trying to wrap your head around the complex world of time and attendance, check out our comprehensive resource page, Time and Attendance - A Complete Guide. This page spells out literally everything you'd need to know about time and attendance, including timekeeping procedures, time clocks, employee scheduling, compliance considerations, emerging trends and a whole bunch more.