Job Order Costing System Flashcards, test questions and answers
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What is Job Order Costing System?
A Job Order Costing system, also known as a job costing system, is an accounting method used to track costs associated with producing a specific product or providing a service. It is one of the most common types of cost accounting systems used in the manufacturing industry and the services sector. This system allows businesses to track and allocate their resources more effectively by assigning costs to each individual job or project.The Job Order Costing System involves tracking the costs associated with each job or project separately from other jobs and projects. The cost components are typically divided into three categories: direct labor, direct materials, and overhead. Direct labor consists of wages paid to employees for their time and effort in completing a task or working on a specific job order. Direct materials are materials such as raw materials that are used directly in production activities for a given job order. Overhead, on the other hand, consists of indirect expenses incurred during production such as rent payments, utilities bills, insurance premiums etc., which cannot be attributed directly to any particular job order but still influence the overall production process.Using this system allows businesses to be more efficient in allocating their resources since they can easily determine what went into each individual job or project while still being able to accurately calculate total costs associated with producing a unit or providing a service. This helps businesses better understand which activities are most profitable and if there is potential for improvement in certain areas of production or service delivery processes by evaluating actual performance against planned performance (budget). Additionally, it helps identify areas where efficiencies can be achieved by eliminating waste and reducing unnecessary expenses related to any given project or activity since all related costs are accounted for separately from general overhead expenses that tend to mask potential savings opportunities if not tracked individually via this type of cost accounting system approach. Overall, Job Order Costing System is an effective way for businesses in both manufacturing and services industries to effectively manage their resources while having full visibility over which projects/activities make them money versus those which don’t contribute positively towards bottom line profits.