A job order costing system is used when a company needs to identify the manufacturing costs associated with certain products.
Explanation:
The job order costing system is used when a company produces several items are different from each other and each has its own cost. To understand the advantages of the job order costing system, we can compare two companies: an oil firm and a playground equipment company.
Since the production of oil does not vary excessively, this firm uses the process costing system because they do not need to worry about different costs every time someone orders a barrel of oil. However, the reality of orders is entirely different for a playground equipment company (and other companies that use job order costing system) since it produces many different items, including swings, slides, and other playsets.
Each of these items is a different product and usually carries a different price. The advantage of a job order costing procedure is that it lets companies understand the real prices for the distinct items they produce.
Many companies manufacture a wide variety of products. Thus, the job order costing system requires a special job cost record for each item, job, or order. The job cost record contains information about each product, including materials, hours of direct labor, amount of manufacturing overhead. In other words, it is necessary to calculate the real price of an item so that a company does not suffer losses, and a buyer does not overpay.
The job cost record is also useful for one more reason. Since it contains all the information about an item, it may be used as an additional ledger or method of documentation for the company.