In a job order cost system, costs are tracked or accumulated by the specific orders (jobs) that are produced. This system is used when a manufacturer is creating custom goods or various quantities of different items. Manufacturers that might use a job order cost system include home or custom car builders. A home or custom car builder needs to know how much each home or car cost to build. A job order cost system is not limited to companies that produce single individual units of output, though. If a university ordered 2,000 promotional items from a printer for one of its academic programs, the printer would use a job order cost system to accumulate costs for the job or batch of items.
If you look at a home being built (later to be sold), you will see that the builder purchases the raw materials that it will use to construct the home (wood, bricks, stone, etc.). The materials are then added to the process, becoming part of the work in process inventory. The builder uses labor to slowly convert the materials into a finished home. The cost of labor is added to the work in process inventory account as it is incurred. The builder will incur other overhead costs as the project progresses, which are also added to the work in process inventory account. The total costs incurred to build the home are transferred to the finished goods inventory account once the building has been completed and is ready for sale. Once the home has been sold, you would transfer the cost of the building to cost of goods sold.
Three inventories are maintained in a job order cost system:
work in process inventory (WIP): This represents the jobs that are in production but not yet completed or the products that are still on the factory floor. The WIP includes the following costs:
The job cost record is used to accumulate the costs for a particular job. A job cost record shows the total direct materials, direct labor, and factory overhead costs for each individual job the company is working on.