For the business management system to function correctly, it is necessary to physically identify each production order and to accumulate each of the costs incurred in each order that generates them, in this way, the system accumulates the costs for each order, batch or order that is physically identifiable as its production progresses. Prior to the initiation of production, an order must have been issued, which is identified by an internal number.
Subsequently, when the cost elements are added, a statistical record is kept of the inputs consumed in each order and accumulated in a format known as a cost sheet. The cost sheet specifically identifies an order and contains the respective spaces to accumulate the raw material, labor and indirect costs consumed for that order.
Costs are recorded as the order moves through the different production departments. Once the production process has been completed, the cost sheet shows the total accumulated cost of the order and, therefore, the unit cost of the product.
Among the many characteristics of the work order costing system are the following: each work order is assigned a sequential number that allows the identification of the cost sheet, which includes the three elements of the cost of production.
The cost sheet of the respective work order accumulates the costs incurred to produce that order. The costing unit is the work order, the cost of finished products is obtained by adding the costs accumulated in the cost sheets of the finished orders.