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What is job order costing?

Job order costing or job costing is a system for assigning manufacturing costs to an individual product or batches of products. Generally, the job order costing system is used only when the products manufactured are sufficiently different from each other. (When products are identical or nearly identical, the process costing system will likely be used.)

Since there is a significant variation in the products manufactured, the job order costing system will create a job cost record for each item, job or special order. The job cost record will report the direct materials and direct labor actually used plus the manufacturing overhead assigned to each job.

An example of an industry where job order costing is used is the building construction industry since each building is unique. The manufacturers of custom equipment or custom cabinetry are also examples of companies that will keep track of production costs by item or job.

The job cost records also serve as the subsidiary ledger or documentation for the cost of the work-in-process inventory, the finished goods inventory, and the cost of goods sold.