What is the difference between job costing and process costing?
Job costing tracks expenses by individual project or customer. Every dollar spent gets assigned to a specific job, so you know exactly what each project cost to complete. Process costing tracks expenses by department or production phase for companies making identical products in continuous batches.
A general contractor building custom homes uses job costing. The lumber, labor, subcontractor payments, and permits for the Martinez house are tracked separately from the costs for the Chen house. When each project finishes, you can see exactly what it cost and compare that to what you charged. The same logic applies to remodelers, electricians, consultants, and anyone working on distinct projects for different customers.
A cement manufacturing plant uses process costing. They’re producing the same product continuously, and it doesn’t make sense to track costs by individual batch. Instead, they track costs by process: mixing, curing, packaging. The cost per unit comes from dividing total process costs by units produced. Bottled water plants, chemical manufacturers, and oil refineries work this way.
The distinction matters because the wrong system gives you useless information. A contractor using generic expense categories without job costing knows total annual profit but has no idea which projects made money. That $50,000 profit might have come entirely from three jobs while seven others lost money. Without tracking costs by job, you’d never know which project types to pursue and which to avoid.
Setting up job costing requires your accounting software to be configured for it. Every expense, timesheet entry, and subcontractor payment gets coded to a job number. The discipline pays off when you can quote future work based on actual historical costs instead of guessing.
If you’re a small business owner wondering which method applies to you, it’s almost certainly job costing. Process costing is specialized for manufacturing environments that most small businesses in Northern New Mexico won’t encounter. Service businesses, contractors, consultants, and anyone billing by project need job-level visibility into their costs. That’s where job costing becomes essential for understanding what your work actually earns.
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