How can job order costing improve your product's competitive advantage?

1 What is job order costing?

Job order costing is a costing system that assigns costs to each individual product or service based on the specific resources and activities used to produce it. It is suitable for businesses that produce heterogeneous products or services, such as custom furniture, consulting, or design. Job order costing allows you to track the direct materials, direct labor, and overhead costs for each product or service separately, and calculate the cost per unit or per job.

2 How does job order costing work?

Job order costing requires that you identify the products or services you offer and assign a job number or code to each one. It is important to estimate the direct materials, direct labor, and overhead costs for each product or service before starting production or delivery. Additionally, you must record the actual costs incurred for each product or service as they are incurred, using source documents like invoices, timesheets, and receipts. Overhead costs should be allocated to each product or service using a predetermined overhead rate which reflects how overhead is consumed by each product or service. Finally, sum up the direct materials, direct labor, and overhead costs for each product or service to get the total job cost or cost per unit.

4 What are the challenges of job order costing?

Job order costing can be a time-consuming and complex process, particularly when tracking and allocating costs for each product or service. Estimating the costs accurately can be difficult, especially if they are new, uncertain, or variable. This can lead to under- or over-costing and have an impact on profitability and pricing. Additionally, it may be challenging to choose an appropriate overhead rate and cost driver for each product or service, as well as updating them regularly. This can affect the accuracy and reliability of your cost allocation and overhead recovery.

5 How can you overcome the challenges of job order costing?

To overcome the challenges of job order costing, you can use a software or app to automate and simplify the process of tracking and allocating costs for each product or service, as well as generate reports and analyses. Additionally, you should use historical data, market research, and customer feedback to estimate the costs for each product or service as accurately as possible. It is also important to use a relevant and consistent overhead rate and cost driver for each product or service, and review them periodically to reflect any changes in your overhead costs or activities.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?