What is a job order costing system?

Job order costing is a system that takes place when customers order small, unique
batches of products. This system determines the price of each individual product and
ensures that the cost for each product is reasonable enough for a customer to purchase
it while still allowing the company to make a profit.

Job order costing systems can gain and track information from financial resources like
material costs, payroll records, supplier invoices and overhead allocations. An
accountant will use these resources to gather the data and calculate or track it using a
job cost sheet. They may also use a job order database to track each product using a
specific identifying number for each product.

Each item tracked in the job order costing system should have a job cost record that
lists the materials used to create that item, the number of people that worked to make
that item, how long it took to make the item and the manufacturing overhead amount for
that product. This helps an accountant keep better track of the money spent on each
item and the current inventory to prevent unexpected losses from occurring.