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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.
