Job order costing
Also known as: job costing, job order cost system
Job order costing is a cost accounting system that accumulates direct materials, direct labor, and applied overhead separately for each distinct job or batch. It suits businesses producing custom or clearly distinguishable products, such as construction, printing, or consulting.
Job order costing tracks cost by job rather than by time period or department. Each order gets its own job cost sheet, which collects the direct materials requisitioned for it, the direct labor hours charged to it, and a share of manufacturing overhead. When the job is finished, the total on that sheet becomes the cost of the completed units, and when the job ships, that amount moves to cost of goods sold.
Overhead is the part that requires estimation. Because indirect costs like factory rent, supervision, and utilities cannot be traced to a single job, they are applied using a predetermined overhead rate: estimated overhead for the period divided by an estimated allocation base such as direct labor hours or machine hours. If the rate is $30 per machine hour and a job uses 40 hours, $1,200 of overhead is applied. At period end, applied overhead rarely equals actual overhead, so the difference is closed out as underapplied or overapplied overhead.
The contrast is process costing, which is used where output is continuous and units are indistinguishable — refining, chemicals, food processing. There, costs are averaged across equivalent units for a department rather than tracked per order. Job order systems also require specific treatment of spoilage: normal spoilage attributable to a particular job stays with that job, while abnormal spoilage is written off as a period loss.
Job order costing is a core CMA Part 1 topic. Expect questions on cost flows through work in process and finished goods, computing and applying predetermined overhead rates, disposing of under- or overapplied overhead, and accounting for normal versus abnormal spoilage.
Key takeaways
- Job order costing accumulates direct materials, direct labor, and applied overhead on a separate job cost sheet for each order.
- Overhead is applied with a predetermined rate based on estimated overhead divided by an estimated allocation base.
- Differences between applied and actual overhead are recorded as underapplied or overapplied overhead at period end.
- Process costing is the alternative system, used when units are identical and production is continuous.
- Normal spoilage on a specific job is charged to that job; abnormal spoilage is expensed as a period loss.