What is job order costing?

Answer 1

Usually a business receives an Order ( by way of Purchase Order) from the customer or clients. This is recorded as Sale Order in the books of the the supplier and begins to manufacture the product as per the specs given by the Customer. Generally a Number is assigned to each of the such Orders received. This Number is called the 'Job Order Number'. The primary purpose of creating Job Order Number is to ascertain the Cost of Goods manufactured against the respective Orders (or Job orders). Direct materials, direct labour and factory cost are added to this Job Order. Direct material includes Cost of Raw materials utilised, while Direct labour means the wages paid to the employees at the Factory. Factory overhead includes Factory Power, maintenance, Factory Rent etc., Administrative expenses are either 'Allocated to 'or 'Absorbed by' the respective Job order.Ultimately Cost of Sales like Advt., Freight etc., is added to the cost . Thus the Total Cost divided by the number of units gives you the "Actual Unit Cost". A percentage of profit ( percentage varies from to product to product ) is added to it. Hope this provides you a basic understanding towards JOB COSTING.