Job order costing accumulates costs for each individual job rather than averaging them across all production. Direct materials and direct labor are traced to the specific job, and manufacturing overhead is applied to it with a predetermined overhead rate. Companies use it when products or jobs differ from one another, so each job needs its own cost record.
The method exists because averaging breaks down the moment output stops being identical. A print shop that produces 500 letterpress wedding invitations and 10,000 mail-order catalogs in the same month cannot divide total cost by 10,500 pieces and learn anything useful — the invitations consumed far more labor per piece. Job order costing keeps each job's costs on its own record, called a job cost sheet, so the shop knows what each job actually cost, can price the next one, and can see which jobs made money.
Job order costing fits any operation whose output is custom or heterogeneous — each job is distinct and worth costing on its own. Print shops, construction contractors, custom furniture makers, machine shops, shipyards, and service firms such as consultancies and law firms (where the job is a client engagement) all use it. The test is simple: if you can point at one job and ask what that one cost, you want job order costing. When output is a continuous stream of identical units — refined gasoline, breakfast cereal, bottled soda — there is no individual job to point at, and process costing, which averages total cost over identical units, takes over.
Every job cost sheet accumulates exactly three kinds of manufacturing cost.
Materials that become part of the finished job and are traceable to it — the maple lumber in a table, the paper stock in a print run. Each time materials leave the storeroom for a job, a materials requisition form records the quantity, the cost, and the job number. The requisitions are the paper trail that ties materials cost to the job.
The wages of employees who work directly on the job, traced through labor time tickets. A time ticket records which job an employee worked on and for how long; the job is charged hours worked times the wage rate.
Everything else the factory spends — glue and sandpaper, factory rent, supervisor salaries, machine depreciation — supports all jobs at once, so no source document can tie it to one job. Instead it is applied using a predetermined overhead rate (POHR): estimated annual overhead divided by an estimated allocation base such as direct labor hours, set before the year begins. How the rate is built, which base to choose, and what happens when the estimates miss are covered in predetermined overhead rate.
Hartwell Millwork builds custom furniture to order. In March it accepts Job 214: twelve matching conference tables for a law firm. Before the year began, Hartwell estimated $487,200 of manufacturing overhead and 23,200 direct labor hours, so its POHR is $487,200 ÷ 23,200 = $21.00 per direct labor hour. Job 214 consumed three materials requisitions and 118 direct labor hours at $26.50 per hour.
| Cost element | Detail | Amount |
|---|---|---|
| Direct materials | Maple lumber (req. R-1108) | $3,184 |
| Veneer and finish (req. R-1121) | $612 | |
| Hardware (req. R-1129) | $487 | |
| Direct materials total | $3,184 + $612 + $487 | $4,283 |
| Direct labor | 118 hours × $26.50 per hour | $3,127 |
| Overhead applied | 118 direct labor hours × $21.00 POHR | $2,478 |
| Total job cost | $4,283 + $3,127 + $2,478 | $9,888 |
| Cost per table | $9,888 ÷ 12 tables | $824 |
Notice what the sheet does not contain: no share of the sales team's salaries, no office rent, no actual overhead bills. If Hartwell quoted the law firm $1,150 per table, the sheet shows a gross margin of $326 per table — and if the next table job comes in, the shop now has real numbers to price it with.
Costs move through the accounts in the same order the product moves through the plant. Purchased materials wait in Raw Materials inventory. When a requisition sends them to a job, their cost moves into Work in Process — and the job cost sheets are the detail behind the Work in Process balance, one sheet per open job. Direct labor and applied overhead are added to Work in Process the same way, job by job. When a job is finished, its total cost moves from Work in Process into Finished Goods; when the customer takes delivery, it moves from Finished Goods into Cost of Goods Sold. The total assembled on the job cost sheet travels intact through all three accounts.
One honest caveat: the overhead on every job sheet is an estimate. Applied overhead comes from a rate built on budgeted numbers, while actual overhead costs accumulate in the Manufacturing Overhead account as real bills arrive — and the two almost never match. When applied exceeds actual, overhead is overapplied; when actual exceeds applied, it is underapplied. The difference is closed out at year-end, most commonly straight to Cost of Goods Sold. So a job's total cost is exact for materials and labor but approximate for overhead — a deliberate trade-off that lets the company cost jobs the day they finish instead of waiting until the year's actual overhead is known.
Putting actual overhead on the job sheet. The job sheet always shows applied overhead: the predetermined rate times the driver the job actually used. Actual overhead costs — the rent bill, the utility invoice — accumulate in the Manufacturing Overhead account and never touch an individual job. When a problem gives you both estimated and actual overhead, the estimates build the rate, the job's actual hours apply it, and actual overhead cost matters only when you compute the over- or underapplied amount.
Confusing tracing with allocating. Direct materials and direct labor are traced: a source document ties each dollar to a specific job. Overhead is allocated: nothing can tie factory rent to Job 214, so a rate spreads it. Ask of every cost, could a source document tie this to one job? If yes, trace it. If no, it goes through overhead.
Sneaking period costs onto the job. Sales commissions, advertising, delivery costs, and office salaries are period expenses. They never enter Work in Process and never appear on a job cost sheet. Only manufacturing costs — direct materials, direct labor, and factory overhead — attach to jobs.
A job cost sheet holds exactly three things: direct materials traced from requisition forms, direct labor traced from time tickets, and overhead applied at a predetermined rate. If a cost is not one of those three, it does not belong on the job.
Job order costing is a cost accounting system that assigns direct materials, direct labor, and applied manufacturing overhead to individual jobs. Each job gets its own job cost sheet, and the open sheets together form the subsidiary ledger behind Work in Process inventory.
When jobs or products are distinguishable from one another — custom orders, construction contracts, client engagements. If units are identical and produced continuously, process costing fits better because there is no individual job to cost.
Three main ones. A materials requisition form records materials moved from the storeroom to a job, a labor time ticket records the hours an employee spent on it, and the job cost sheet accumulates everything into the job's total cost.
Through a predetermined overhead rate: estimated annual overhead divided by an estimated allocation base such as direct labor hours, set before the year begins. The job absorbs the rate times the actual amount of the base it used — never a share of actual overhead bills.
Job order costing accumulates costs by individual job because each job differs; process costing accumulates costs by department and averages them over identical units. A custom millwork shop uses job order costing; a soda bottler uses process costing.
At year-end the difference between applied and actual overhead is closed out. Most textbook problems close the entire amount to Cost of Goods Sold; companies with a material difference prorate it across Work in Process, Finished Goods, and Cost of Goods Sold.
By the FinanceBrain Team · Last verified July 11, 2026 · How we produce and verify articles