Definition: A job order cost accounting system uses job cost sheets, material cost flow documents, labor cost flow documents, and overhead cost flow documents to track the production expenses of producing a job or job lot. In other words, a job order cost accounting system tracks each and every expenditure the company makes in order to produce a product.
Most manufacturers produce many different products. Each of these products requires a slightly different production process. Each job or job lot has a specific budgeted cost to produce and an estimated selling price.
For instance, a customer might order 10,000 t-shirts from a silk screen company. The silk screen company will charge the customer a standard price and print the t-shirts. If the production processes go according to budget, the silk screen company will be able to print the t-shirts for less than the selling price. How does the company keep track of the production expenses? It uses a job order cost accounting system.
What Does Job Order Cost Accounting System Mean?
Going back to our silk screen company example, first the cost of the t-shirts would be tracked (material costs). Second, the time that it takes designers to create the t-shirt design and printers to make the screens and print the shirts would be tracked (labor costs). Third, the ink and materials used to make the screens would be accounted for (overhead costs). All of these expenses would be combined on a job cost sheet. If the production went according to plan, the total job cost will be on budget and less than the selling price.