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Job costing is valuable for companies who provide custom orders, where there are distinct and identifiable units of a product or service being provided, and where individual jobs require different quantities of production resources. Process costing is valuable for companies who mass-produce large quantities of the same product.

One main difference between the costing methods is the extent of averaging used to calculate unit costs. Another difference is that while the journal entries for job costing are very similar to process costing journal entries, the process costing method uses one work in process account for each process.

Process costing assigns total costs to many identical units of output by dividing the total costs by the number of units being produced.  With process costing, each unit receives the same amount of direct cost, and the same amount of indirect cost. Process costing separates costs into categories according to when costs are introduced into the process, with all direct costs (including direct manufacturing costs, direct material costs and direct manufacturing labor) being added at the same time (usually at the beginning of the process), and with the conversion costs (indirect costs) being added evenly throughout the process.

The cost per equivalent unit is determined separately for direct materials and conversion costs because the cost categories are determined based on when the costs are introduced into the process. While direct materials are (usually) incurred 100% at the start of the process, the conversion costs are added evenly throughout the process. So while units that were started and completed would have incurred 100% of both direct materials and conversion costs, units that are started but not completed will have incurred 100% of direct materials, but only a percentage of the conversion costs.

Process costing differentiates between physical units and equivalent units. Physical units are the number of output units, whether completed or not. Equivalent units need to be determined to figure out how many units would have been completed to 100% with the conversion costs incurred that only partially completed the units. Equivalent units are a derived amount of output units that (1) takes the quantity of each input in units completed and incomplete in work in process and (2) converts the quantity of input into the amount of completed output that could be produced with that quantity of input.

The two popular methods to allocate costs in process costing are the FIFO (first in first out) method and the weighted-average method. The weighted-average method calculates cost per equivalent unit of all work done to date and assigns this cost to equivalent units completed and transfered out, and to equivalent units in ending work in process inventory. The FIFO method assigns the cost of the previous accounting period equivalent units in beginning work in process inventory to the first units completed and transferred out of the process. The FIFO method then assigns the cost of equivalent units worked on during the current period first to complete beginning inventory, then to started and completed new units and finally to units in ending work in process inventory. The FIFO method assumes that the earliest equivalent units in work in process are completed first, and it separates the work done in the previous period with the work done in the current period. The costs incurred in the current period are used to calculate the cost per equivalent unit of work done in the current period. This allows managers to be more aware of changes in costs per unit from one period to the next and enables them to adjust selling prices based on the information. This method also makes evaluating performance easier. Meanwhile, the weighted-average method merges units and costs in beginning inventory with units and costs of the current period. This method leads to a lower cost of goods sold and a higher operating income, resulting in higher income taxes that the company must pay. This method also results in lower cost of units completed and transfered out and higher ending work in process inventory. A downside of the weighted average method is that due to the fact that it merges units from different accounting period, period to period comparisons become difficult to make.

An example of a type of production which would be most suitable to employ a process costing system would be a soda manufacturer. This is because a soda manufacturer produces mass-quantity of the same product. Each unit incurs the same amount of direct cost and the same amount of indirect cost. The FIFO or weighted-average method would be appropriate to use.

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