Definition of Job Order Costing
Job order costing or job costing is a system for assigning and accumulating manufacturing costs of an individual unit of output. The job order costing system is used when the various items produced are sufficiently different from each other and each has a significant cost. (When a company’s output consists of continuous flows of identical, low-cost units, the process costing system is more appropriate.)
Since there is a significant variation in the items manufactured, the job order costing system requires a separate job cost record for each item (or each job or special order). The job cost record will report each item’s direct materials and direct labor that were actually used and an assigned amount of manufacturing overhead.
The job cost records also serve as the subsidiary ledger or documentation for the manufacturer’s cost of the work-in-process inventory, the finished goods inventory, and the cost of goods sold.
Examples of Job Order Costing
A few examples of the use of job order costing are:
- A company that designs and produces custom-made machines and/or machine tooling
- A company that constructs custom-designed buildings
- A company that modifies trucks to meet customers’ special needs
