Job-order costing is one of many different accounting costing systems. Finding the right system for a business is key to monitoring and controlling costs.
There are many different types of costing systems that management and cost accountants may come across. Each of these costing systems may handle certain entries in a different way. One type of costing system that is popular in certain industries is called job-order costing. Job-order costing can be used in some circumstances where other types of costing such as process costing or normal costing would not be as effective.
What Is Job-Order Costing?
Job-order costing is a cost system that is used to accumulate costs by jobs. These jobs could also be called batches, as each job is generally a “batch” of similar products. Each batch should be individualized in some way to make it differentiated from other batches for it to be a separate job. If batches were all identical, another type of costing would be more appropriate.
The Job-Order Costing Process
When a company operates using job-order costing, a specific set of events will usually occur with each job. Generally, the process is as follows:
- An order (or sales order) is received for the batch of products
- A production order is issued from the sales order
- Materials and labor are ordered and tracked for the set of products
- Manufacturing overhead is allocated to the job using a predetermined rate (usually per labor hour or per machine hour)
- Actual manufacturing overhead will not affect the work-in-process account, instead it is charged to a control account
- Direct labor and materials are charged by the accountant to the work-in-process accounts using the actual amounts incurred
- These amounts are all tracked using a job-costing sheet, which will most likely be in a computerized format and a subsidiary ledger is kept for each job
- Abnormal spoilage (spoilage that is above and beyond what would be expected from the job) is considered a period cost and is reclassified from the work-in-process account into a separate account so it can be addressed by management.
When Is Job-Order Costing Appropriate?
Job-order costing is a type of costing that can be used in many different industries, although not all. Industries that sell items in batches will be able to use job-order costing most effectively. For example, a T-shirt company that makes batches of T-shirts with company logos on them may use job-order costing, each company they work for could be classified as an individual job. Job-order costing would probably not be used in other industries such as general manufacturing, as products may not be specialized and therefore would not be classified in batches.
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