Job Order Costing

Job costing or job order costing is the costing method in which company allocates variable and production overhead costs to the individual job. While each job represents a unit or a batch of products.

In business, there are many different ways to keep track of costs. One method, known as job order costing, is often used in manufacturing or other process-oriented businesses. Under this system, each job is assigned a unique identifier, and all of the costs associated with that job are tracked separately. This allows managers to see exactly how much each job is costing and makes it easier to identify areas where costs can be reduced.

We use this costing method when a company manufactures unique products in terms of features and cost. Companies use it for their customized product which varies from one client to others. Job order costing is also suitable for services industry such as auditing, accounting, lawyer, custom-design, and construction. However, it is less appropriate when the company produces similar products. It is more efficient to use activity-based costing (ABC) and process costing.

Job Costing Process

Features of Job Costing

These are the common features of job costing:

  • The company does not keep stock of finished goods due to the differences in each product.
  • We only produce after receiving customer orders.
  • Each product will have different customization depending on customer.
  • Each product or batch requires different costing which is known as Special Order Costing.
  • Only material and labor are allocated based on actual consumption. The overhead cost will be allocated based on estimation.

Process of Job Order Costing

  1. Create job code
  2. Allocate cost to job code
  3. Calculate total cost
  4. Compare with budget

1. Create Job Code

Each job must have its own identity, which is called “Job Code,” to make sure that all relevant costs assign to the right job. Again the job code can be a unit of product or a batch.

After setting up the job code, the production department needs to calculate the budget of each job. The budget includes direct material, direct labor, and overhead. Then all information needs to inform relevant departments such as warehouse, purchasing, HR, etc.

2. Allocate Costs to each job

By using this method, the company needs to allocate all costs to each job, such as:

Direct Material

Every time materials withdraw from the warehouse, the requested person needs to identify the job code of the items used. Companies usually use Job Cost Sheet to capture all the material costs. And it will be monitored every month to ensure that they follow the budget without any significant variance.

Direct Labor

All workers need to specify the job which they are working on their timesheet to calculate the total cost. They usually work as a small team for each job code and the supervisor is responsible for their job allocation. 


Overhead allocation is a bit complicated in this method. We need to use the estimated cost as below:

Predetermined Overhead Cost = Estimate Overhead Cost / Estimate Activities

Most companies use labor or machine hour as the cost driver for allocating costs to each job. However, we can use other assumptions that we think are more reasonable for our business.

3. Calculate Total Cost

Total cost is calculated by summing all the costs above, and calculating the cost per product if our job represents the batch product. 

Total Cost = Direct Material + Direct Labor + Overhead Cost

4. Compare with Budget

We need to analyze the budget and actual cost. Any variance needs to investigate and make a change for the next job budget if necessary. It also has a huge impact on management decisions on setting up the price as well.

Example of Job Order Costing

Company A uses job-order costing to calculate each product cost. The company just received the order from the customer on a custom job with the estimated cost as below:

  • Material 5,000 units with cost $ 2 per unit
  • Direct Labor 2,000 hour with a cost of $ 10 per hour
  • Estimated overhead cost for the whole year equal to $ 120,000
  • Company estimated to operate 120,000 of machine-hours for the entire year

Company A uses the machine hour as the basis for calculating overhead allocation for the example of job order costing.


  1. Set up job code: The company can use any acronym plus sequential number to identify each job. In this example, we use “BIZ001”.
  2. We allocate and calculate costs as below:
    • Direct material: $ 10,000 ( 5,000 units @ $2 per unit)
    • Direct labor : $ 20,000 (2,000 hour @ $10 per hour)
    • Overhead: $ 2,000 ($ 120,000/120,000 * 2,000 labor hours)
  3. Total cost: $ 32,000
  4. Compare the actual cost with budget.

Objective of Job Order Costing

  • It is important for businesses to keep track of the manufacturing cost of each project in order to determine whether they are making a profit or incurring a loss. This information helps businesses to make decisions about whether or not to make changes. By knowing the manufacturing cost of a project, businesses can adjust their prices accordingly and make sure that they are getting the most out of their products. Additionally, this information can help businesses to negotiate better deals with suppliers and to find ways to cut costs.
  • One of the benefits of a business keeping accurate records of their projects is that it helps them to create more accurate estimations for similar projects in the future. This is because they can look back at past reports and see exactly how much time and resources were required for each stage of the project. They can then use this information to create a more accurate estimate for future projects. This is especially useful for businesses that undertake a lot of similar projects, as it can help them to save time and money by avoiding any potential over or under-estimation. Inaccurate estimations can lead to a number of problems, such as delays, cost overruns, and dissatisfied customers. Therefore, it is essential that businesses take the time to create accurate estimates for their projects.
  • It helps to evaluate the unfinished job. Many businesses find it helpful to provide a valuation of work-in-progress (WIP). This helps businesses to track the value of unfinished work and ensure that it is appropriately accounted for in the financial statements. The valuation of WIP can be a complex process, and businesses should carefully consider the methods they use. There are a number of different approaches that can be used to value WIP, including estimating the costs of materials, labor and overhead. In some cases, businesses may also need to factor in the expected profits from the finished product.
  • This information can be used to determine the profitability of individual jobs, and to make decisions about pricing, bidding on new projects, and managing costs. While there are many different factors to consider when job costing, one of the most important objectives is to find out which jobs are more profitable and which are not. By understanding which jobs are more profitable, businesses can focus on pursuing similar projects in the future. On the other hand, if a job is not profitable, steps can be taken to either reduce costs or increase prices. In either case, job costing is an essential tool for making informed decisions about how to run a business.

What are the Advantages of Job Order Costing

Advantages of Job Order Costing

Easy to access the performance of each project, product type, or batch

When we use job costing, it’s easier to appraise each job profit and select the best profitable product for sale. Management can make a proper decision before accepting any new job from the customer. The job that does not perform well may need to reduce while the good performing job needs to increase.

Improvement within company

By using job costing, we have enough data to make any benchmark from one job to another and make sure that the weakness will be improved from time to time.

Internal Benchmark

It will be a proper tool to compare one team to another and encourage them to improve on their work effecient.

Increase the utilization of machine-hours and other resource

With the use of job costing, the management will be able to allocate all available resources to maximize the output.

What are the Disadvantages of Job Order Costing?

Even job order costing has many benefits, but there is also some downside which we need to aware as included in table below:

Disadvantages of Job Order Costing

Complication over cost allocation

Job costing is a very good concept, but it may turn out to be a complicated process when the company has many jobs that are easy to get confused.

Inaccuracy on overhead allocation

We use the estimated method to allocate overhead costs, which may lead to wrong costing. This estimate relies on experience management and history data. If there are any errors in data or estimation, the whole work will be useless.

Increase administrative cost

Besides core competent work, we need to allocate resources to control the flow of material and labor. There must be someone to collect date of material movement and worker allocation. In some companies, it even requires a new IT system to support this costing method.

Inflexible working process

Resource Allocation requires appropriate documents that are not flexible enough to change immediately. Some tasks need to delay or pause due to the process.