To make decisions based on data

A job order costing system develops into a useful database that contains the specifics and expenses associated with jobs throughout time. The information that is kept can be utilized as empirical data to assess the company’s efficiency and find cost-saving opportunities by altering practices, processes, or staffing.

 To keep track of equipment use

Job order costing enables businesses to monitor their use of fixed assets, such as manufacturing machinery. Since machine costs vary depending on the job, it’s crucial to identify these costs in order to understand the job’s cost. This makes it easier to allocate overhead equally among the tasks inside the organization and determine how much is assigned to each asset.

What components make up the cost?

All of the various costs incurred during an item’s manufacture are included in the item’s elements of cost and should be factored into the item’s final price. These consist of:

Material cost

The expense incurred for purchasing materials that are necessary for the manufacturing process is known as the material cost. Depending on how closely they may be linked to the product, these expenses are categorised as direct or indirect. If the raw material used to make the product is a necessary component and is used directly in the product, then the expenses are direct costs. For instance, since wood pulp is the main raw material used in the production of paper, it has a direct cost. Any materials required to support the production process are considered indirect costs. An illustration of an indirect cost would be the oil and coolant used in the paper-making machinery to keep it running and cooled during the production process.

Direct labor

The cost of the workers who are directly involved in the production of the good is referred to as direct labour. Their pay and any additional perks they receive while working on the product are included. For instance, direct labour includes both the person who gathers wood pulp and delivers it to be processed into paper and the person who oversees the entire production process from beginning to end. The guards or janitors, on the other hand, who are hired to keep an eye on and help during the production process are indirect labourers and are not counted as direct labourers.

Direct expenses

The costs that can be directly linked to a department’s spending are known as direct expenses. These include costs for product design, tool upkeep, and purchasing machinery utilised directly in product manufacturing. They are listed in the income statement’s COGS (Cost of Goods 

Factory overhead

 Any manufacturing expense incurred during the production of the product that is not directly related to labor and materials is referred to as factory overhead. It covers costs like the cost of the electricity bill, the cost of cleaning supplies, the depreciation of the equipment used, the depreciation of the land on which the manufacturing facility is situated, and the cost of property taxes. The whole cost of factory overheads is added to the cost sheet at the end and charged to the final goods.

You can determine the total cost of the job step by step with the aid of job order costing. This technique enables you to identify faults, determine whether the job is profitable, identify opportunities for process development, keep track of the usage of fixed assets, and produce more accurate bids for the next jobs. For a manufacturer who creates a variety of unique products, it is a very effective costing technique.