Definition of Job Order Costing

Job order costing or job costing is a system for assigning and accumulating manufacturing costs of an individual
unit of output. The job order costing system is used when the various items produced are sufficiently different
from each other and each has a significant cost. (When a company's output consists of continuous flows of
identical, low-cost units, the process costing system is more appropriate.)
Since there is a significant variation in the items manufactured, the job order costing system requires a separate
job cost record for each item (or each job or special order). The job cost record will report each item's direct
materials and direct labor that were actually used and an assigned amount of manufacturing overhead.
The job cost records also serve as the subsidiary ledger or documentation for the manufacturer's cost of the
work-in-process inventory, the finished goods inventory, and the cost of goods sold.
Examples of Job Order Costing
A few examples of the use of job order costing are:

 A company that designs and produces custom-made machines and/or machine tooling
 A company that constructs custom-designed buildings
 A company that modifies trucks to meet customers' special needs

Definition of Process Costing

Process costing is a term used in cost accounting to describe one method for collecting and
assigning manufacturing costs to the units produced. A processing cost system is used when nearly identical
units are mass produced. (Job costing or job order costing is a system used to collect and assign manufacturing
costs to units that vary from one another.)
Example of Process Costing
Let's assume that a company manufactures large quantities of an identical product. The product requires several
processing operations, each of which occurs in a separate department. In the first department, the following
processing costs were incurred during the month of June:

 Direct materials of $150,000

 Conversion costs of $225,000
If the equivalent of 100,000 units were processed in June, the per unit costs will be $1.50 for direct materials
and $2.25 for conversion costs. These costs will then be transferred to second department where its processing
costs will be added.

Job Order Cost Sheet definition

This is a record on an individual job (product, batch) within the job costing system. For items in process this is a
subsidiary record to the general ledger account inventory: work-in-process (WIP).

Normal Costing definition

The actual cost of direct materials, the actual cost of direct labor, and manufacturing overhead applied by using
a predetermined annual overhead rate.

Actual Costing definition

A method of costing manufactured items that differs from normal costing and standard costing. Under actual
costing each accounting period's actual manufacturing overhead costs and each accounting period's production
volume are used to assign manufacturing overhead to the output.

Actual Overhead definition

The indirect manufacturing costs actually incurred during an accounting period.