Job Order Cost Accounting

Job order cost accounting is a type of costing that is used when it is fairly easy to track costs to a specific job. This type of accounting is used for large item manufacturing or for services that are large in comparison to a firm's income. For example, a manufacturer that makes airplanes would use this type of accounting, as would a lawyer. In both of these instances, the actual costs for the airplane and for a client's case are collected and reported as costs for these specific items.

In repetitive manufacturing where a product is produced in large quantities over and over, the usual method of costing is standard cost accounting.  Job order cost accounting would not be practical in this situation, but is the best method of costing when individual products and services are non-repetitive in nature.

This particular way of tracking costs is used for:

  • Large manufacturing jobs such as airplanes or special machinery
  • Building trades
  • Auto repair
  • Legal work by an Attorney

Costs are usually recorded and collected on a job cost sheet.

A job cost sheet is used to summarize the costs on a particular job. Each job will have its own sheet and will be able to be identified with a unique name or project number. The summary sheet will have sections for each of the following types of costs:

Airplane to illustrate job order cost accounting Direct Labor is the costs associated with the employees who are building the product or performing the service. In the case of manufacturing, it's the assemblers and machinists. In a law firm it's the lawyer working on a case.

Indirect Labor is the costs relating to the employees that are indirectly working on the project. These employees would include machine repair, fork truck drivers, etc. These individuals are responsible for keeping machinery running, keeping parts stocked, delivering product, etc.

Usually in these large projects, employees will keep track of the time they spend on each project. In this way, the actual time spent on the job can be recorded.

Materials used for the project can amount to a large amount of the total costs in manufacture of a product. A materials requisition form is used to track the materials for each project. This form is filled out for each material used in the project, noting the project name or number. The form should also include information noting the material name or part number, quantity, cost per unit and cost in total. This information from the materials requisition form is then used to fill out the materials section of the job cost sheet that was mentioned previously.

Burden costs are the overhead costs that a business incurs. An easy way to get an idea of these costs and how they might be applied to a product is to imagine our airplane manufacturer plant. In this plant, two airplanes can be manufactured at a time. The plant has costs for heat, electric, taxes, rent, etc. In this easy example, these costs could be divided in two, with half of the costs charged to each plane. In reality it is rarely this simple to allocate burden costs, but the idea is to fairly allocate costs that are not directly related to individual products or services.

When the project is complete, the job cost sheet should be complete also. The total costs based on job order cost accounting will then be known for the project. The customer is billed for the agreed upon revenue amount and the amount from the job cost sheet is subtracted from this revenue. The result is the profit or loss for the project.