Nov 03, 2021Job Order Costing: The What and How
Businesses can account for the costs of their goods and services using different methods, two of which are job order costing and process costing. While both methods allow businesses to accurately record their manufacturing costs, they are used for different purposes and situations. This article details the process of job order costing: what it entails, what forms it requires, and what industries benefit from this accounting method.
Job Order Costing Overview
Some companies offer unique products to their customers, and since these products can vary in their manufacturing costs, job order costing allows accountants to record the total cost that goes into each product. Job order costing differs from process costing, which is used when companies offer a general product that does not vary in its production costs (i.e., bulk items).
The job order costing method provides companies with a more accurate picture of their profitability, since it accounts for the total costs of producing goods and services. The costs recorded with job order costing includes the cost of the product materials and the cost of labor for each product sold or service rendered.
Actual Costing vs. Normal Costing
There are two main types of job order costing: actual costing and normal costing. Actual costing records the exact—or the actual—costs of product production, rather than estimating it. While this method seems like good way to keep things as accurate as possible, it often is not feasible to record costs this way because it takes too long.
Since the actual costs cannot be known until after a product is completed and sold, most companies opt to use the normal costing method to save time. Companies that use normal costing will budget funds and estimate the manufacturing costs to the best of their abilities.
Job Order Costing Forms
Job order costing systems require specific forms to accurately reflect expenses as well as prepare for unexpected changes or profit loss. The following are a few common forms companies use for job order costing:
- Materials Requisition Form: This form details the materials that have been taken from inventory and used to make a product for a job order.
- Job Cost Sheet: This is the main form used to track the cost of a product and includes all relevant dates, materials used, labor information, and all costs.
- Time Ticket: Employees use this form when they work on a unique order, and they include their information, the job number, the date, the hours worked, their hourly pay, and the total cost of the job.
(For more information on these forms, see What is Job Order Costing?)
Job Order Costing Examples
Many businesses use the job order costing method to account for the costs of their goods and services, but some are more likely to use this method than others. The following are some examples of industries that would benefit from job order costing due to the nature of their business:
- Law Firms
- Medical Services
- Film & Photography
Each of these industries presents different factors as to why job order costing would be appropriate for their situation. The following paragraph details some of those key factors.
Job Order Costing Factors
For a company to decide that job order costing would be appropriate for their needs, there are several key factors that they should analyze. The following questions can help with determining whether or not job order costing is the right option for a company:
- Are the company’s products or projects individualized or made for a small group?
- Do the customers or clients consume time and resources differently?
- Do the customers or clients require different services, or services that are delivered to varying degrees of complexity?
If a business answers yes to any of these questions, it would benefit from using the job order costing method to account for company costs.