Learning Outcomes
Show Job order costing is a method of cost accumulation used for items or batches of items that are unique—that is, each customer’s order is different. Custom-made kitchen cabinets are an example of a manufactured product that is often customer-specific. Each order is based on different sizes, layouts, wood choices, finishes, hardware, installation costs, customer preferences, etc. No two orders are alike, so the total cost of each order will differ. A single order might involve a homeowner updating her kitchen for a new look. A batch order might be processed for a home builder who is constructing 10 identical homes and therefore requires 10 of the same sets of cabinets. Each single or batch order is referred to as a job and is assigned a unique identification number, such as “Job 15.” In general, companies match the flow of costs to the physical flow of products through the production process. They place materials received from suppliers in the materials storeroom and record the cost of those materials to raw materials inventory when purchasing them. As they are needed for production, the materials move from the materials storeroom (raw materials inventory) to the production departments with their cost as shown below. During production, the materials processed by workers and machines become partially manufactured products. At any time during production, these partially manufactured products are collectively known as work in process (or goods in process). For example, if accountants compute the inventory when the company has partially finished products at the end of the year, this inventory is Work in Process Inventory. Completed products are finished goods. When the products are completed and transferred to the finished goods storeroom, the company removes their costs from Work in Process Inventory and assigns them to Finished Goods Inventory. As the goods are sold, the company transfers related costs from Finished Goods Inventory to Cost of Goods Sold. Some of the defining characteristics of Job Order Costing include:
You can view the transcript for “Job Order Costing” here (opens in new window). ExampleMitchell Manufacturing is a small company that produces specialty bicycles. Each bicycle is made to order per customer specifications. Orders are taken by the customer service department, and handed off to an engineering support person to configure the job. A parts list is made and then the job is moved to production. Every Monday morning, the engineering group, manufacturing supervisor, and accounting manager meet to go over the orders for the week. A job number is assigned to each order. Then a bill of materials, or list of the direct materials needed for each bicycle is created. From this list, the purchasing department can get all of the items on order, using a materials requisition form. The accounting department needs to ensure that the job cost sheet is generated, that it includes all of the materials for the job, and that the labor involved and manufacturing overhead is added. As the job goes through the manufacturing process, each step in the process is added to the job cost sheet which accumulates all of the costs involved in the building of this one job. When the job is completed, the accounting department has all of the information necessary to total the costs involved in making this bike, thus knowing whether the initial price quoted was accurate. This process helps ensure that customers are charged correctly, and allows the company to adjust pricing on future similar jobs if needed. Job costing is used by a variety of businesses for a variety of reasons and can be an effective method to price products and services. Practice QuestionsContribute!Did you have an idea for improving this content? We’d love your input. Improve this pageLearn More What does a job order costing system do?Job order costing is a costing method which is used to determine the cost of manufacturing each product. This costing method is usually adopted when the manufacturer produces a variety of products which are different from one another and needs to calculate the cost for doing an individual job.
How do the costs flow in a job order cost system?In a job costing system, the cost is tracked from raw materials to finished goods with costs such as direct labor, machine hours, and manufacturing overhead assigned to the job via a job cost tracking sheet. The costs are then utilized to assign a selling price for the item manufactured.
What are the costs in job order costing applied?To summarize the job order cost system, the cost of each job includes direct materials, direct labor, and manufacturing overhead. While the product is in production, the direct materials and direct labor costs are included in the work in process inventory.
Is job costing the same as job order costing?Job costing, also known as job order costing, and process costing are cost accounting systems designed to help businesses keep track of all the costs they have to pay to produce a product or deliver a service. The type of costing method you use depends on the type of business you're running.
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