This is the method employed by firm's producing non-identical products or services to plan and manage their cost of   production.  Usually involves a relatively small number of units. 

Goal is to have a system that will: 

1. Allow the firm to produce a cost estimate to enable it to:

   Win the job 

   Make an acceptable profit 

2. Have a realistic basis that he actual expenditures can be controlled which is necessary to make the projected profit
3. Track the actual expenditures incurred to produce a job

Can use either:

Historical Costs

Standards Costs

Basically the cost of a job is the total of all expenditures that have been made to produce it.

Relatively easy is determination of what was spent for direct costs (direct material and direct labor) since these are changed directly to where it is actually used.  Difficult and perhaps arbitrary is how the

Support costs

Overhead costs

Selling expense

General and administrative Expense

Corporate overhead

are allocated to a job or project (i.e. Lockheed Martin)

Needs to be done so that all costs are recovered through customer payment.

Obvious if not done correctly, the product is under or over costed.

Our interest is to understand

What job order costs are

How a job order cost estimate can be developed

How the actual cost of a job are determined.

Note:  Both the cost estimate and actual job costs are a function of the accounting system and the cost allocation system being employed.

Presently two cost systems are employed

1. Traditional

2. Activity Based Costing

The subject matter can best be understood by going over an illustrative example.

Method increasingly employed to allocate OH costs to products is Activity Based Costing