An Introduction to Job Order Costing System | How it works?

Did you know? Accounting was first used in Mesopotamian civilization thousands of years back and this is the farthest humans have been able to trace. However, the introduction of the double-entry bookkeeping system a wholly new concept in accounting was later put forward by Luca Pacioli in 1494 who is said to be the father of modern accounting.

Later, the need for advancements in the accounting systems came with the industrial revolution and as a result, various new concepts were introduced to accounting which was better equipped with insights so that the organizations could analyze their financial positions in detail such that the management can make decisions backed by cognizance of over their financials.

At the same time, concepts such as types of costs, financial statements, budgeting, ratio analysis, process costing, job order costing, etc. were included in modern accounting. One of the great concepts of accounting is job order costing which diversifies direct and indirect costs to particular products determining the cost of manufacturing for each product.

Nevertheless, a job order costing system is an integral part of AIS (Accounting Information System) which can process data to process financial information related to particular products so that the organizations don’t have to get into the hassles of calculating these costs manually especially when there are varied product lines.

How Job order costing works?

In a job-order costing model, costs are divided into the following three sections making it easier for accountants to calculate these costs.

Direct materials:

Direct material includes all the raw material or all the materials which support the manufacturing of products directly. For instance, in a leather manufacturing facility to create leather bags, leather as a raw material is used and polish to shine up the leather is also a direct material.

Direct labor:

Direct labors are the people who are involved directly in manufacturing the product. If we use the above example again of manufacturing the leather bags, laborers involved in the manufacturing of the products are direct labors. However, a security guard of the same facility is indirect labor which is counted in the overhead costs.

Overhead:

The overhead includes all other things which are involved in manufacturing the product including utility bills, legal issues, rent, insurance, and depreciation of the machinery, etc.

Following are the few objectives as to why the organizations get into the job order costing model:

Accuracy:

Organizations want to be very clear with the figures while making decisions and strategies, especially to find out if a particular product is underperforming.

Control:

Enterprises sometimes get into the hustle of work activity and as a result, they get over-occupied so they have to decide which product to work on and which to abandon.

In this case, job order costing can help an organization to calculate the worth of each product and distinguish which are high performing and which of them are low performing to make decisions to remain working or to opt-out.

Profit:

It helps the organization find the cost of production of every individual product and the profit it makes. This helps the organization to decide which product to focus more on to get high productivity.

On the other hand, there are certain features in the job order costing system which distinguish it from other costing methods: Some of them are as follows:

Characteristics:

In a job-order costing system, each and every job has its own characteristics. And all these jobs need some kind of special treatment.

Order: 

1. All these jobs in the job order costing system are done only when is required by the customer. They are not a part of the regular production.
2. Cost center: Cost centers are those departments that do not generate revenue for the company directly but are important such as Human resources, accounting. So in job order costing, every job is treated as a cost center.
3. Cost: In job order costing, the cost of production of every job is calculated once the production is done.

There are several benefits of using a job order costing system. Some of them are:

1. Efficiency: In job order costing, one of the advantages is that it helps to identify how efficient is the machinery and the manpower working on a particular product line.
2. Cost: It helps an organization to become cost efficient by helping them to use the resources more efficiently.
3. Analysis: Job order costing system helps an organization to evaluate the direct materials, direct labors, and the overhead costs which are included in the production of the job to work out better on even the smallest aspect of manufacturing a product.
4. Profit: An organization can decide which job will help them generate revenue and which job is more profitable than the other.
5. Defects: A job order costing system can help identify the defects and the mistakes which can be eliminated in the future by taking counter measures.

There are a few factors that should be considered before choosing a job order costing system. Some of them are:

1. The production control should be very effective and strong.
2. There are some documentary requirements for bills of the materials or work orders.
3. Frequent time sheets are needed.
4. An organized system should include the cost centers, labor analysis, overhead rates, and pricing system with its issues.

A job order cost system is for organizations that have to work according to the demands of the customers and manufacture according to their needs. It is important to see all the costs of the direct materials, direct labor, and overheads.

Besides, it is worthwhile because of the number of technical skills and does endeavor to provide a lot of knowledge to control the costs, use the resources efficiently, and make sure that everything is going according to the budget which is allocated to production.

Many organizations use the job order costing system. There are systems or software programs available which can help organizations to calculate job order costs without putting in a lot of effort and time which can make the organizations manageable and efficient.

There are many job order costing systems that are available from different developers. QBM however is a promising choice by accountants and organizations wanting to improve their process flows, accounting, compartmentalization, and systems.

The accounting system is incorporated with all the fundamental and advanced concepts which can be processed automatically by providing the basic cost information. QBM is an ERP system that can be custom designed or chosen from 6 different options for varying organizations.

QBM GUIDELINE:

For the past 17 years, QBM has been a choice of thousands of great entrepreneurs and rapidly growing organizations as it nearly automates all the information systems with ease of accessibility which ensures the availability of data from around the world.

Would you want your organization to achieve high growth figures? Surely you do. So, what are you waiting for? Try QBM today for free.