Job order costing

A job order costing system is a cost system that is used to accumulate costs by jobs. This costing system is used where many different products are produced each period. Under a job order costing system costs are traced to the jobs and then the costs of the job are divided by the number of units in the job to arrive at an average cost per unit. For example in clothing factory there would be many different types of jeans for both men and women during a month. The jobs are classified as batches as each job is generally a “batch” of similar products. Each batch is differentiated and individualized so that it can form a separate job.

The job order costing process involves a number of steps. Under this process first an order is received for the products and a production order is issued from the sales order. The materials and labor are ordered and tracked. The manufacturing overhead is allocated to the job that uses a predetermined rate. Direct labor and materials are charged to the work-in-progress using the actual amounts incurred. These amounts are tracked using the job-cost sheet and a subsidiary ledger is maintained. Lastly an abnormal spoilage is considered as a period cost and is re-classified from the work-in-process account.

Job order costing is used in many different industries. Items that are sold in batches by industries will be able to use job-order costing most effectively. Job-order costing would not be used in industries such as general manufacturing, as products may not be specialized and therefore would not be classified in batches. Job order costing system is also used in service industries. For example hospitals, law firms, movie studios, accounting firms, advertising agencies and repair shops all use a variety of job order costing system to accumulate costs for accounting and billing purposes. The details dealt with a manufacturing firm, the concept and procedures are same that are used by many service organizations.   

Questions

• What is a job order costing system?
• What are the steps involved in a job order costing process?