Definition of job order costing

accumulation of costs by specific jobs, contracts, or orders. This costing method is appropriate when direct costs can be identified with specific units of production. Job order costing is widely used by custom manufacturers such as printing, aircraft, construction, auto repair, and professional services. Job order costing keeps track of costs as follows: (1) direct material and direct labor are traced to a particular job; (2) costs not directly traceable-factory overhead-are applied to individual jobs, using a predetermined overhead rate. The overhead rate is equal to the budgeted annual overhead divided by the budgeted annual activity units (direct labor-hours, machine-hours, etc.). At the end of the year, the difference between actual overhead and overhead applied is closed to cost of goods sold, if there is an immaterial difference. On the other hand, if a material difference exists, work-in-process, finished goods, and cost of goods sold are adjusted on a proportionate basis based on units or dollars at year-end for the deviation between actual and applied overhead.