Why It Matters: Job Order Costing

There is a company called American Tugs in LaConner, Washington on the shore of Puget Sound just north of Seattle that makes custom yachts based on a tugboat hull mold. Check out American Tugs’ website here.

Each yacht starts with a design and then moves through production, incurring costs such as fiberglass, labor, parts, and manufacturing overhead. You can see a full list of the standard parts and specifications for model 362 here.

Aerial photo of a boat on the seaAmerican Tugs offers several models: 362, 365, 395, 435, and 485, and each boat can be customized for a particular client. The base models sell for around $500,000, and the deluxe models can sell for upward of $1 million.

It is important for the production manager to know how much each boat costs. If a customer orders a boat for $500,000 and the sales staff has itemized a list of options that bring the total estimated cost of the product to $450,000, then the company stands to make a profit of $50,000. This raises the question of how the managerial and financial accountants will track the actual cost of the boat. What if actual costs come to $550,000? With multiple boats in production, how will management know which are profitable and which are losing money?

Job costing, also called project-based accounting, is the process of tracking costs and revenue for each individual project. Job costing looks at each project in detail, breaking down the costs of labor, materials and overhead.

Job costing is commonly used in the construction industry, where costs vary widely from job to job. But it’s also used by manufacturers, creative agencies, law firms, and more. Because job costing tracks costs in detail for each job, it can be a helpful tool for small-business owners to evaluate individual jobs and see whether any expenses can be reduced on similar projects in the future.