Job order costing is used when several types of products can be manufactured and their costs are accumulated according to customer specifications. An order in a job order costing system may consist of a single unit or it may consist of many identical or similar units covered by a single job order.
In manufacturing, a job may be a single unit such as a house, or it may be a batch of units such as eight tables. Work order systems are used to produce items for inventory to be sold subsequently in a general market.
Often, however, a job is associated with a particular order from a customer. The basic characteristic of job order costing is that the cost of one job differs from that of another and must be tracked separately.
In job order production systems, costs are accumulated by job. This approach to cost allocation is called job order costing. In a job order costing company, the collection of costs by job provides vital information for management. Once a job is completed, the unit cost can be obtained by dividing the total manufacturing costs by the number of units produced.
The aforementioned author goes on to state that, in this system, various types of products are produced and their costs are accumulated in accordance with the customer's specifications, each of the components of the production cost are accumulated in the respective order and the unit cost is obtained by dividing the production settlement by the total number of units resulting from the order.