What Companies Use Job Order Costing?

Job order costing is an accounting method designed to track the costs associated with producing unique products or services. This system is essential for businesses that create items or projects tailored to a customer’s specific requirements, rather than mass-producing identical goods. Its purpose is to accurately determine the total cost of each individual job, enabling businesses to understand profitability and make informed pricing decisions.

Core Principles of Job Order Costing

Job order costing is applied when each product or service is unique and distinguishable from others. This means costs cannot be averaged across a large volume of identical items. Instead, expenses are accumulated for individual jobs or projects.

The method assigns three primary cost elements directly to each job: direct materials, direct labor, and manufacturing overhead. Direct materials are raw goods that become a physical part of the finished product and can be directly traced to a specific job. Direct labor refers to wages paid to employees who physically work on the product or perform the service for a particular job. Manufacturing overhead includes all other indirect costs incurred in the production process, such as factory rent, utilities, and depreciation of machinery. These indirect costs are systematically allocated to each job using a predetermined method. A job cost sheet serves as a detailed record for tracking these accumulated costs for every unique order.

Industries and Business Models Suited for Job Order Costing

Many industries and business models inherently require job order costing due to the custom nature of their output. Businesses engaged in custom manufacturing often use this method for specialized machinery or bespoke furniture, where each piece differs significantly. Construction companies, whether building homes or large infrastructure projects, also rely on job order costing because every project is unique in scope, materials, and labor requirements.

Service industries providing unique client projects find job order costing equally valuable. Advertising agencies developing distinct campaigns, law firms handling individual client cases, and consulting firms undertaking specific projects for each client all fit this model. Repair and maintenance services, such as auto repair shops or facilities specializing in equipment overhaul, also benefit by tracking costs for each repair job. Print shops producing custom orders or businesses offering bespoke tailoring services similarly utilize job order costing to accurately capture the expenses of each unique customer request.

Specific Business Examples

A custom home builder exemplifies a business that uses job order costing. Each house is a unique project with varying designs, materials, and labor requirements, making it essential to track costs per property. This allows the builder to accurately price each home and assess its profitability.

A law firm employs job order costing for each client case. Every legal matter involves specific hours of attorney time, research needs, and administrative support, all tracked to determine the cost and profitability of that case. An advertising agency uses this method for each client campaign. Developing a marketing strategy, creating custom content, and managing media placements for different clients necessitate detailed cost tracking per project.

A specialized machine shop producing custom parts also relies on job order costing. Each part often requires unique specifications, different raw materials, and varying production times, making individual job cost tracking crucial. An aircraft repair and overhaul facility, dealing with complex service contracts, tracks every component, labor hour, and specialized process for each aircraft to ensure accurate billing and cost control.

Information Tracked for Each Job

For each job, a job order costing system tracks specific information for accurate cost accumulation. Direct materials consumed are recorded, including types and quantities of raw goods incorporated into the product or service.

Direct labor hours spent are documented, along with the associated labor cost, including time workers dedicate to the production or service delivery. Manufacturing overhead, including indirect costs like factory utilities or equipment depreciation, is applied to the job based on a predetermined rate.

The system also tracks administrative details such as the job number, customer information, and project details to maintain a comprehensive record for each order.