Cost-accumulation method that traces materials, labor, and overhead to specific jobs or batches.
Job order costing is a cost-accounting method that accumulates direct materials, direct labor, and applied overhead for a specific job, order, project, or batch. It is used when the work is distinct enough that management wants the cost of each job separately.
Job order costing helps businesses price custom work, measure job profitability, value work in process, and understand where costs are accumulating. Without it, custom or project-based businesses can easily underprice work or misread margins.
As costs are incurred, they are traced or assigned to an individual job cost sheet. Direct materials and direct labor are usually traced directly, while overhead is applied using a chosen allocation base such as labor hours or machine hours.
When the job is finished, its accumulated cost moves out of work in process and into finished goods or directly into cost of sales, depending on the business model. That makes job order costing important for both internal decisions and inventory reporting.
A custom cabinet manufacturer tracks Job 217:
| Cost Component | Amount |
|---|---|
| Direct materials | 4,000 |
| Direct labor | 3,000 |
| Applied overhead | 2,100 |
| Total job cost | 9,100 |
Management can compare the 9,100 job cost with the selling price to judge profitability.
Job order costing is not the same as a generic job order document. It is an accounting method. It also differs from process costing, which averages costs across large volumes of similar output.