Costing methods: Job order costing

Costing methods: Job order costing

Description/Paper Instructions

Costing methods: Job order costing

Job order costing is a costing method used to determine the cost of manufacturing each product. This costing method is usually adopted when the manufacturer produces a variety of products which are different from one another and needs to calculate the cost for doing an individual job.

In job order costing, each job is considered a separate cost unit. This means that all the costs incurred in completing the job are accumulated in a separate account for that job. The costs that are accumulated in the job cost account include direct materials, direct labor, and manufacturing overhead.

Direct materials are the materials that can be easily traced to a specific job. For example, if a company is manufacturing furniture, the wood used to make the furniture would be considered direct materials.

Direct labor is the labor that is directly involved in the manufacturing of a product. For example, the wages of the carpenters who assemble the furniture would be considered direct labor.

Manufacturing overhead is all the other costs incurred in the manufacturing process that cannot be easily traced to a specific job. For example, the costs of the factory rent, utilities, and indirect labor would be considered manufacturing overhead.

The costs of direct materials and direct labor are easily traced to specific jobs. However, the costs of manufacturing overhead are not easily traced to specific jobs. Therefore, the costs of manufacturing overhead are allocated to jobs using a predetermined overhead rate.

The predetermined overhead rate is calculated by dividing the estimated manufacturing overhead costs for the period by the estimated number of machine hours or direct labor hours for the period. The predetermined overhead rate is then used to allocate the costs of manufacturing overhead to jobs.

The steps involved in job order costing are as follows:

Identify the job. The first step is to identify the job. A job can be a product, a service, or a contract.

Track the costs of the job. The next step is to track the costs of the job. This includes tracking the costs of direct materials, direct labor, and manufacturing overhead.

Allocate the costs of manufacturing overhead. The costs of manufacturing overhead are allocated to jobs using a predetermined overhead rate.

Calculate the cost of the job. The cost of the job is calculated by adding the costs of direct materials, direct labor, and manufacturing overhead.

Close the job cost account. The job cost account is closed when the job is completed.

Job order costing is a useful costing method for companies that manufacture a variety of products or services. This costing method allows the company to track the costs of each job and to determine the profitability of each job.

Here are some of the advantages of job order costing:

It provides accurate cost information for each job.

It helps to identify the most profitable jobs.

It can be used to track the costs of long-term projects.

Here are some of the disadvantages of job order costing:

It can be more complex than other costing methods.

It requires a lot of record-keeping.

It can be difficult to allocate manufacturing overhead costs accurately.

Job order costing is a versatile costing method that can be used in a variety of industries. It is a good choice for companies that manufacture a variety of products or services and that need to track the costs of each job.

Costing methods: Job order costing

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