Key Difference – Job Costing vs Batch Costing
Job costing and batch costing are two specific order costing systems that are used by businesses. When the products are different from one another, or when a range of products are manufactured by the same company, it is difficult to assign the costs using a standard basis. Job costing and batch costing provides a convenient way of allocating costs in such businesses. The key difference between job costing and batch costing is that job costing is a system used for completion of specific customer orders where each unit produced is considered a job whereas batch costing is a method of costing when a number of identical units are produced in a batch, but each batch is different.
CONTENTS
1. Overview and Key Difference
2. What is Job Costing
3. What is Batch Costing
4. Side by Side Comparison – Job Costing vs Batch Costing
5. Summary
What is Job Costing?
Job costing is a system used for completion of specific customer orders where each unit produced is considered a job. When the products are unique in nature, the cost of producing two different products cannot be compared effectively since the amounts of materials, labor and overheads will vary from one job to another. Each job will be assigned a unique identifier and a ‘job cost sheet’ will be used to record all job-related information.
E.g. KMN is a customized gift item manufacturer. KMN will charge the cost of the gift item plus a 25% profit margin on cost. The job code is KM559. Consider the following costs.
| Cost | Amount ($) |
| Direct material | 115 |
| Indirect material | 54 |
| Direct labor ($10 per hour for 6 hours) | 60 |
| Indirect labor ($8 per hour for 6 hours) | 48 |
| Manufacturing overheads (9 per hour for 8 hours) | 72 |
| Total cost | 352 |
| Profit (30%) | 88 |
| Price charged | 440 |
Job costing helps to identify costs and profit earned for individual jobs; thus it is very convenient to identify each job’s contribution to firm’s profit. Based on the cost to serve a particular customer, the company can decide whether it is lucrative to continue business relationships with such customers. Furthermore, management can estimate the cost of a new job based on the cost of past jobs.
However, job costing can also result in information overload since the company has to keep track of all the usage of cost components such as materials and labor due to no standardization. Since all the costs for individual jobs have to be calculated from scratch, job costing is expensive and time-consuming. For overall management decisions such as assessing company profitability, these individual job information is of limited use.
Figure 01: Sample job cost sheet
What is Batch Costing?
Batch costing is a method of costing used when a number of identical units are produced in a batch but each batch is different. Here, each batch is a separately identifiable cost unit and assigned a batch number. A batch will generally include a standard number of units; as a result, costs can be identified against each batch. Unit cost for an individual item in the batch is found by dividing the total batch cost by the number of items in the batch.
Similar to job costing, a profit markup is added in order to arrive at the selling price of the cost of the batch. Batch costing is largely used by FMCG (Fast Moving Consumer Goods) manufacturers, engineering component manufacturers, footwear and clothing manufacturers.
E.g. DEF Company is a footwear manufacturer who produces different types of footwear. Each type of footwear is produced in batches. The cost for a single type of footwear batch is as follows.
Direct materials $ 19,000
Direct labor $ 21, 150
Overheads (variable and fixed) $ 22, 420
Total $ 62,570
DEF adds a profit markup of 30% for a batch of footwear. The number of units in the batch is 2000.
Selling price (cost + profit markup of 30%) = $ 81,341
Unit selling price ($81,341/2000) = $ 40.67
Figure 01: A number of identical products will be manufactured in a batch
What is the difference between Job Costing and Batch Costing?
Job Costing vs Batch Costing |
|
| Job costing is a system used for completion of specific customer orders where each unit produced is considered a job. | Batch costing is a method of costing used when a number of identical units are produced in a batch but each batch is different. |
| Accumulation of Costs | |
| In job costing, costs are accumulated for a job code number. | In batch costing, costs are accumulated for a batch code number. |
| Calculation of Costs | |
| In job costing, all the costs are added to arrive at the total cost of a specific job. | In batch costing, the cost of an individual unit is calculated by dividing the cost of the batch by the number of units in the batch. |
Summary – Job Costing vs Batch Costing
The difference between job costing and batch costing mainly depends on whether a completed product is considered as one job (job costing) or a number of standardized units (batch costing). The type of organizations in which the job costing and batch costing is used are also different to each other where the former is mainly used by companies who provide customized products and the latter is used by companies who produce a range of products for mass production. However, the objectives of both systems are similar, where they attempt to allocate the cost of production in an efficient manner.
Reference:
1. Jeferson. “Advantages and Disadvantages of Job Costing.” Money Matters | All Management Articles. Money Matters | All Management Articles, 31 May 2016. Web. 22 May 2017. <http://accountlearning.com/advantages-disadvantages-job-costing/>.
2. Aishwarya, Sivakumar Aishwarya Sivakumar . “Job and batch costing.” LinkedIn SlideShare. N.p., 22 Apr. 2016. Web. 24 May 2017. <https://www.slideshare.net/AishwaryaSivakumar5/job-and-batch-costing-61243431>.
3. “ACCAPEDIA.” Kfknowledgebank.kaplan.co.uk. N.p., n.d. Web. 24 May 2017. <http://kfknowledgebank.kaplan.co.uk/KFKB/Wiki%20Pages/Batch%20Costing.aspx>.
Image Courtesy:
1. “Red Wing Shoes factory” By Nina Hale – (CC BY 2.0) via Commons Wikimedia