Absorption Costing: Plunging into Deeper Waters
Two main types, often referred to as extremes that are each on their own end of the line, are project costing and process costing. The details of these two types of absorption costing methods are explained in the next article in this series. For now a simple--well, fairly simple--introduction is all that is necessary. Actually, understanding the differences between the two types is fairly simple.
Process costing is typically used in manufacturing companies that produce mass amounts of one type of product over a long period of time. Confused yet? Try thinking aluminum foil, Saran wrap, standard 3" binders, Coke, and so on.
Job order costing is used, you got it, when the product line varies more. In this system the manufacturer might be producing items of clothing that vary in size, color, fashion, and so on. It's called job order costing because like items are processed in batches. For example, an order for 500 small red t-shirts is called a batch or a job.
Believe it or not, job costing is also used in the service industry. So your friendly neighborhood accountant has probably used the job costing method a time or two. Besides the accountant it's used in service industries such as hospitals and lawyers. While each industry may vary slightly in applying the job costing system, it's all relatively the same thing.
Photo courtesy of aa7ae, on Flickr.