Job order costing (JOC) is the optimal costing method for producing custom goods or when it is easy to identify the cost directly with the product.
A JOC system assigns costs to each individual job as the costs are incurred, so that at all points in the manufacturing process, the costs assigned to that particular job are known.

Direct materials are requested on a materials requisition form and recorded on the job cost sheet when transferred from raw materials inventory to the work in process inventory.
Time tickets are used to accumulate the labor associated with particular jobs and assigned to those jobs on the job cost sheet.
Manufacturing overhead costs are accumulated in the manufacturing overhead account and assigned to the individual jobs using the predetermined overhead rate.

Materials used in production include the beginning raw materials inventory and purchases, less the ending inventory. This amount is the amount added to the work in process inventory.
The cost of goods manufactured includes the beginning work in process inventory, the materials used in production, the direct labor assigned to each job, and the manufacturing overhead costs assigned, less the costs remaining in the work in process inventory. This amount is transferred to the finished goods inventory.
The cost of goods sold include the beginning finished goods inventory and the cost of goods manufactured during the period, less the ending inventory.
When the job is completed, the costs are transferred from the work in process inventory to the finished goods inventory.
When the jobs are sold, the costs are transferred from the finished goods inventory to the cost of goods sold.

Expenses are recognized when they have a direct relationship with the associated revenue, when there is a systematic and rational method to allocate them, or immediately when there is no expected benefit.
The estimated activity base is typically direct labor dollars or direct labor hours, and is based on an allocation base that increases or decreases as overhead increases or decreases.
The predetermined overhead rate is the estimated overhead divided by the activity base.

Costs from the materials requisition sheet and time tickets are recorded on the job cost sheet.
Overhead is allocated from the manufacturing overhead account to the individual jobs and recorded on the job cost sheet.
Each job has its own job cost sheet, showing the materials, labor, and overhead for each job.

Overhead is allocated to individual jobs based on the estimated overhead costs for the year and may be overapplied or underapplied for the year.
Overhead is underapplied when not all of the costs accumulated in the manufacturing overhead account are applied during the year.
Overhead is overapplied when more overhead is applied to the jobs than was actually incurred.
The amount of overhead overapplied or underapplied is adjusted into the cost of goods sold account.

Job cost sheets record the material, labor, and overhead costs for each job, whereas journal entries actually transfer the costs into the work in process inventory, the finished goods inventory, and cost of goods sold.

Job order costing can be used in nonmanufacturing companies and with the same techniques, even though there are not any inventory accounts.

Summary