4.1 Job Order Costing System Overview

Job order costing is a crucial system for tracking costs in industries with unique products or services. It assigns direct materials, labor, and overhead to specific jobs, enabling accurate pricing and profitability analysis for custom orders.

This method contrasts with process costing, which is used for high-volume, low-variety production. Job order costing follows a specific cost flow, from raw materials to finished goods, providing detailed insights for decision-making and inventory valuation.

Job Order Costing System Fundamentals

Characteristics of job order costing

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• Tracks costs for individual jobs or batches assigns direct materials, direct labor, and manufacturing overhead to unique job cost sheets
• Provides detailed cost information for specific customer orders enables accurate pricing and profitability analysis
• Supports decision-making for future job quotes by analyzing historical cost data
• Allows for cost control and performance evaluation through job-specific comparisons
• Facilitates work-in-process inventory valuation by tracking costs at each stage of production

Industries using job order costing

• Custom manufacturing produces unique items (furniture, aircraft)
• Professional services bill by project or case (law firms, consulting companies)
• Construction industry builds specific structures (homes, commercial buildings)
• Printing and publishing creates distinct publications or print runs
• Repair and maintenance services work on individual equipment or facilities
• Healthcare providers track costs for patient treatments (hospitals, specialized clinics)

Cost flow in job costing

1. Direct materials purchased and stored in raw materials inventory
2. Materials requisitioned for specific jobs, costs transferred to work-in-process inventory
3. Direct labor recorded and assigned to work-in-process inventory based on time spent on each job
4. Manufacturing overhead accumulated and applied to jobs using predetermined overhead rate
5. Completed job costs transferred from work-in-process to finished goods inventory
6. Upon sale, costs moved from finished goods to cost of goods sold

Job order vs process costing

• Job order costing traces costs to specific jobs suitable for low-volume, high-variety production (custom furniture)
• Process costing accumulates costs by department or process appropriate for high-volume, low-variety production (soft drinks)
• Job order uses job cost sheets for each order while process costing averages costs over units produced
• Job order calculates costs upon job completion process costing calculates at period end
• Work-in-process inventory valued by individual jobs in job order costing by department in process costing