Manufacturing & production
Job order costing: how to know what each production job really cost
Job order costing explained: materials, direct labor and overhead per job, overhead rates, a worked example, variances and how to collect accurate data.
Job order costing assigns production costs to individual jobs, such as a customer order, a batch or a project. It suits manufacturers that make different products or custom orders, like furniture, printing, fabrication, packaging, garments and machinery. With accurate job costs, you know which orders make money, can quote confidently and can see where cost overruns happen.
The three cost elements
| Element | What it includes | How it is assigned |
|---|---|---|
| Direct materials | Raw materials and components used in the job | Material issues recorded against the job |
| Direct labor | Wages of workers who work directly on the job | Hours recorded per job × labor rate |
| Manufacturing overhead | Indirect costs: supervision, utilities, depreciation, maintenance, supplies | Applied using a predetermined rate |
Predetermined overhead rate
Overhead cannot be traced to jobs directly, so it is applied using a rate set at the start of the period:
Overhead rate = budgeted overhead ÷ budgeted activity (for example, direct labor hours or machine hours)
Example: budgeted annual overhead of ₱9,000,000 and 60,000 budgeted direct labor hours give an overhead rate of ₱150 per direct labor hour. Choose the activity base that best drives overhead: machine hours for automated plants, labor hours for labor-intensive ones.
Worked example: Job #101
A customer orders 1,000 custom cabinets.
| Cost | Computation | Amount |
|---|---|---|
| Direct materials | Issued to the job | ₱120,000 |
| Direct labor | 300 hours × ₱110 per hour | ₱33,000 |
| Overhead | 300 hours × ₱150 per hour | ₱45,000 |
| Total job cost | ₱198,000 | |
| Cost per unit | ₱198,000 ÷ 1,000 | ₱198 |
If the selling price is ₱260 per unit, the job's gross margin is ₱62 per unit, or about 23.8%.
Comparing actual to estimate
Before the job, you quoted based on estimated costs. After the job, compare:
| Estimate | Actual | Variance | |
|---|---|---|---|
| Materials | ₱110,000 | ₱120,000 | ₱10,000 unfavorable |
| Labor hours | 280 | 300 | 20 hours unfavorable |
| Total cost (labor at ₱110 and overhead at ₱150 per hour) | ₱182,800 | ₱198,000 | ₱15,200 unfavorable |
Investigate: was material scrap higher than standard? Did a machine issue add labor hours? Feed the findings into future quotes and process improvements. See production cost control.
Over- and under-applied overhead
At period end, actual overhead rarely equals applied overhead. The difference is under-applied (actual higher) or over-applied (actual lower). Small differences are typically adjusted to cost of goods sold; large ones may be allocated among work in process, finished goods and cost of sales. Agree the treatment with your accountant.
Collecting accurate data
Job costing is only as good as floor data:
- Material issues recorded against the job when materials leave the store, with returns credited
- Labor time recorded per job by operators or supervisors, ideally through the same system as attendance (timekeeping)
- Scrap and rework recorded with reasons
- Job status updated as work progresses (WIP tracking)
Job costing vs. process costing
Process costing averages costs over large volumes of identical units, common in continuous production like beverages or cement. Many plants use a hybrid: job costing for batches, with process-like averaging within each batch.
Where Cirquolus fits
Cirquolus Production management supports job orders, floor processing and productivity, performance and cost monitoring. Materials flow from purchasing and warehousing, and results reach financial management.
Frequently asked questions
What is job order costing?
A costing method that accumulates materials, labor and overhead for each job or batch separately.
How is overhead applied in job costing?
Using a predetermined overhead rate, such as overhead per direct labor hour or machine hour, multiplied by the job's actual activity.
When should a company use job order costing?
When products differ by order or batch, such as custom manufacturing and project-based production.
What is a job cost sheet?
A record of all materials, labor and overhead charged to a job, used to compute total and unit cost.
Bring this workflow to a Cirquolus demo.
Show us your current process, companies and branches. We will map it to the modules you need and propose a realistic rollout.