Job-Order Costing Basics Explained with Animation

Welcome to job-order costing! This accounting method is perfect for businesses that create unique products for each customer.Let's visit a custom furniture workshop where each piece is made to order.Three different customers place orders for three unique pieces: a dining table, an office chair, and a storage cabinet.For each unique order, the workshop creates a job cost sheet to track all costs associated with that specific piece.The job cost sheet acts like a container that collects all costs specific to each unique piece of furniture.In job-order costing, we track how costs flow from raw materials, through the production process, to finished goods.Each job is tracked separately as it moves through the production process, maintaining its unique identity and accumulating its specific costs.In job-order costing, every job accumulates three main types of costs.First, we have direct materials. These are raw materials that can be directly traced to specific products, like wood for a custom table.Second, direct labor represents wages paid to workers who directly work on the product, such as assembly workers and machine operators.Third, manufacturing overhead includes all other factory costs that can't be directly traced to specific jobs, like utilities and supervisor salaries.These costs flow through a system of accounts, starting with raw materials.As materials are used, labor is applied, and overhead is allocated, costs move into Work in Process.Finally, when jobs are completed, their costs are transferred to Finished Goods.This flow of costs is tracked using T-accounts, showing the movement from raw materials through production to finished goods.All these costs are recorded on individual job cost sheets, which serve as detailed records for each specific job.The job cost sheet accumulates direct materials, direct labor, and overhead costs, providing a total cost for each job.Now let's track how costs flow through a specific job.When materials are needed, a materials requisition form is filled out.The cost of materials, five hundred dollars for oak wood, is recorded on the job cost sheet.Next, workers log their time on time cards, showing hours worked on specific jobs.The labor cost of two hundred dollars is calculated from the time card and added to the job cost sheet.Manufacturing overhead is applied using a predetermined rate based on labor hours.The overhead cost of one hundred and twenty dollars is calculated using the predetermined rate of fifteen dollars per labor hour.Let's summarize the total cost for this job.When the job is completed, the total cost of eight hundred and twenty dollars is transferred to finished goods inventory.Let's review the key points about tracking and calculating job costs.Remember to track all costs on individual job sheets, use source documents for accurate recording, apply overhead using predetermined rates, and transfer completed job costs to finished goods inventory.Thanks for learning about job cost tracking with Spark.E!