Updated: Aug 3
What is Job Costing?
Job order costing is a system of expense monitoring in which a business only creates products to fill customer/client orders. Employees complete job order cost sheets for each order and usually separate expenses into three main categories: direct material, direct labor and manufacturing overhead. Companies in many industries can use job order costing, though a variety of product offerings/services complicates the tracking of expenses.
What kind of businesses can use Job Costing?
Manufacturing companies incorporate job order costing as a means of controlling usage of raw materials, production equipment and labor hours. These businesses consider each customer order a separate job for the purposes of job order costing. Alternatively, manufacturers may group smaller value projects together under a single job heading. How manufacturers group jobs depends on the size of the company.
For example, a small business manufacturer may consider any job valued over $1,000 as a single job, but they may group smaller customer orders together in blocks of $1,000 for costing purposes.
Construction projects require a range of inputs, from labor to various types of materials and tools. Identifying the exact cost of all inputs for specific jobs can be challenging. Costing techniques in construction management require input workers on the job and solid record-keeping. Job costing can be especially useful for construction project managers to keep track of their total job expenses.
White Collar Businesses
Companies in the white collar sector of business, including law firms, accounting businesses and private investment companies, can utilize job order costing to manage individual client accounts.
For example, accounting firms can consider each individual client a job. Firms complete job order cost sheets each business day, detailing how accountants are handling client accounts and how many hours a client's needs consume each day. This generates daily costs that businesses can use to measure how much money firms bring in each day versus the costs associated with job activities.
Medical Services Businesses
Medical services businesses, including hospitals, small doctor's offices and medical billing companies, can use job order costing to consider each patient or bill as an individual job. Record-keeping for job order costing in service industries, including the medical field, can be more complex than in other industries because these businesses offer a wide array of services. This requires medical service businesses and other service companies to keep detailed records of each specific job to determine costs correctly.
For example, a doctor's office may order patients based on the purpose of visits and the cost of treatments administered.
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Retail companies, including clothing producers and retail outlets, employ job order costing to track sales of clothing by size, individual articles and broader styles. This allows retail companies and other businesses to track expenses to create a variety of job order cost models to show how costs vary from product to product.
Businesses in the entertainment industry, including film studios, can create separate job order cost sheets for each film the studios create. Job order cost sheets for film companies contain actor salaries, director payments and crew wages as direct labor costs. Direct material costs can include props, costumes, utility costs for sound stages and set design fees.
A job order cost system is one in which a firm counts the costs for each separate "batch" of work separately. In other words, the company treats different jobs as separate things and therefore tracks the costs of each job separately from the other jobs. Because of this, a firm that uses this sort of system should be one whose jobs are not all the same.
In short the kind of firm that should use this system is a firm that does many jobs that are distinguishable from one another.
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