Job order costing system is generally used by companies that manufacture a number of different products. It is a widely used costing system in manufacturing as well as service industries.
Manufacturing companies using job order costing system usually receive orders for customized products and services. These customized orders are known as jobs or batches. A clothing factory, for example, may receive an order for men shirts with particular size, color, and design.
When companies accept orders or jobs for different products, the assignment of cost to products becomes a difficult task. In these circumstances, the cost record for each individual job is kept because each job have a different product and, therefore, different cost associated with it.
The per unit cost of a particular job is computed by dividing the total cost allocated to that job by the number of units in the job. The per unit cost formula is given below:
Per unit cost = Total cost applicable to job / Number of units in the job
Job order costing is extensively used by companies all over the world. According to a survey, 51.1% of manufacturing companies in United States use job order costing.
Examples of manufacturing businesses that use job order costing system include clothing factories, food companies, air craft manufacturing companies etc.
Examples of service businesses that use job order costing system include movie producers, accounting firms, law firms, hospitals etc.