- Describe a situation in which job order costing is used
Let’s take a look at when job order costing is used and how it is used.
Different types of business use job order costing. Manufacturing companies use the process to track each product they build, while service businesses including law offices and CPA firms utilize a job order costing system for invoicing individual clients.
Mitchell Manufacturing is a small company that produces specialty bicycles. Each bicycle is made to order per customer specifications. Orders are taken by the customer service department, and handed off to an engineering support person to configure the job. A parts list is made and then job is moved to production. Every Monday morning, the engineering group, manufacturing supervisor and accounting manager meet to go over the orders for the week.
A job number is assigned to each order. Then a bill of materials, or list of the direct materials needed for each bicycle is created. From this list, the purchasing department can get all of the items on order, using a materials requisition form.
The accounting department needs to ensure that the job cost sheet is generated, that it includes all of the materials for the job, and that the labor involved and manufacturing overhead is added (this will be discussed in a future module). As the job goes through the manufacturing process, each step in the process is added to the job cost sheet which accumulates all of the costs involved in the building of this one job. When the job is completed, the accounting department has all of the information necessary to total the costs involved in making this bike, thus knowing whether the initial price quoted was accurate.
This process helps ensure that customers are charged correctly, and allows the company to adjust pricing on future similar jobs if needed.
Job costing is used by a variety of businesses for a variety of reasons and can be an effective method to price products and services.