Processcosting is used when there is an abundant production of similarproducts, and the cost of one unit of output cannot be differentiatedfrom each other. The cost of each product produced is assumed to bethe same. A company that would use process costing is oil refining(Griffin, 2010). For example, to determine the precise cost ofproducing one gallon of aviation fuel when thousands of gallons arebeing gushed out every hour in a refinery, process costing is used asa method of value counting.
Inthe company, the manufacturing cost that is incurred is distributedto the departments that are within the enterprise rather than tospecific products. The oil refining would not use job order costingbecause it involves the production of different types of goods withina single period. In job order costing, direct material and laborcosts are identifiable directly to jobs while actual overhead is nottraced directly to jobs (Griffin, 2010). Oil refining uses the keydocument as the department production report which shows theaccumulation and disposition of cost unlike in job order costingwhich uses job–cost sheet.
Theprocess costing is essential in the activities that it performsbecause the processing departments are identical for every unit thatpasses through, and the output is homogeneous. Process costing is aneasier method to use when costing standardized products compared toother methods (Griffin, 2010). Process costing also creates aflexible production process in that if a company needs to refine itsprocess, it can only add or remove it as necessary. Flexible processcosting would allow the company to lower the production expenditureof each product. In conclusion, if a company has mixed massproduction system and then customizes the complete product earlier tothe shipment then both process costing and job order costing systemscan be applied.
Griffin,D. (2010). Businesswith a purpose: Starting, building, managing and protecting your newbusiness.Denver, Colo: Outskirts Press.