Introduction to Job Order Costing

What you will learn to do: understand the characteristics of job order costing

Kitchen with tall cabinetsThere are two general methods of tracking costs in a manufacturing business: process costing and job order costing.

Job order costing is a method of cost accumulation used for items or batches of items that are unique—that is, each customer’s order is different. Custom-made kitchen cabinets are an example of a manufactured product that is often customer-specific. Each order is based on different sizes, layouts, wood choices, finishes, hardware, installation costs, customer preferences, etc. No two orders are alike, so the total cost of each order will differ. A single order might involve a homeowner updating her kitchen for a new look. A batch order might be processed for a home builder who is constructing 10 identical homes and therefore requires 10 of the same sets of cabinets. Each single or batch order is referred to as a job and is assigned a unique identification number, such as “Job 15.”

The accounting flow of costs follows the physical flow of the manufacturing process in most companies. In this chapter and the next, we assume costs follow the physical flow of products. In discussing product costing, we described how accountants and managers assign costs to products. Recall that products can be either goods or services, so this discussion applies to service and merchandising companies as well as to manufacturing companies.

When you are done with this section, you will be able to:

  • Identify circumstances where job order costing is appropriate
  • Compare and contrast job order costing and process costing
  • Calculate job costs for a service business

Learning Activities

The learning activities for this section include the following:

  • Reading: Characteristics of Job Order Costing
  • Self Check: Characteristics of Job Order Costing
  • Reading: Jobs v. Processes
  • Self Check: Jobs v. Processes
  • Reading: Job Order Costing for a Service
  • Self Check: Job Order Costing for a Service