When a company provides products or services that have characteristics unique from those of other products or services, it uses job order costing. The job order costing approach that a company uses depends on its products or services. It uses job numbers to identify the specific product or service. The accountant accumulates direct material, direct labor, and manufacturing overhead under each job number to determine the cost of that specific job. Adding together the costs of all not-yet-completed jobs, the company calculates the total value of items in production, which is the work in process (WIP) inventory.
At A Glance
Job order costing links manufacturing costs to specific jobs, often using accumulated data from job cost sheets.
- Managers use allocation bases as standard units to determine how manufacturing overhead costs accumulate for each product or job.
- It is the managers' responsibility to decide how to allocate costs, which include not only direct labor but also sales and administrative costs.
- A predetermined overhead rate requires estimating of future costs.
- A company may use one predetermined overhead rate for simplicity or blend multiple rates from different departments to determine costs more accurately.
Manufacturers and service organizations often use job order costing to track direct labor costs.
- Manufacturing firms and service organizations allocate costs differently because of differences in cost centers and direct materials.