Explain Job-order & process costing.

Job Order Cost Accumulation System

A job order cost accumulation system is most suitable where a single product or batch of products is manufactured according to a customer’s specifications, that is, each job is “custom made,” with the agreed-upon selling price closely tied to estimated cost. Examples of types of companies which might use job order costing are printing companies and ship-building firms.

Under a job order cost system, the three basic elements of a product’s cost-direct materials, direct labor, and factory overhead – are accumulated according to identifiable jobs. Individual work-in-process inventory accounts are set up for each job and are charged with the cost incurred in the production of the specifically ordered unit(s). The unit cost for each job is computed by dividing the total number of units in the job into the total cost accumulated in that job’s work-in-process inventory account upon its completion and prior to its transfer to finished goods inventory. Job cost sheets are set up as the job begins and stay active until goods are completed and transferred to finished goods. The job cost sheet is then pulled from the work-in-process subsidiary ledger, processed further, and filed under completed jobs. Selling and administrative expenses are not considered part of the cost of producing the job and are shown separately on the job cost sheet and income statement.