Chapter 5: Job Order Costing

Absorption Costing—direct materials + direct labor + all overhead costs are recorded as inventory and
then expensed when they are sold.

Job Order Costing—used by companies that make relatively small quantities of a unique product.
Examples—building a house, construction of a commercial jet, production of a movie, a printing
job, preparing a tax return

Process Costing—used by companies that make large quantities of the same goods over and over (mass
production)
Examples—boxes of cereal, manufacturing bricks, gasoline, paint

Job Costing
Direct materials will be specifically traced to each job.
Direct labor will be specifically traced to each job.
Overhead will be allocated to each job based on some predetermined overhead rate.