How job order costing may be controlled by a standard Cost system

Standard costing can be utilized in a job shop environment. Standards may be established both for the quantities of production inputs and the prices of those inputs. By using standard costs rather than actual costs, managers have a basis for evaluating the efficiency of operations. 

 

Differences between actual costs and standard costs are captured in variance accounts. By analyzing the variances, managers gain an understanding of the factors that cause costs to differ from the expected amounts. Standard costing is most easily adopted in job shops that routinely produce batches of similar products.

Job order costing assists management in planning, controlling, decision making, and evaluating performance. It allows managers to trace costs associated with specific current jobs to better estimate costs for future jobs. Additionally, managers using job order costing can better control the costs associated with current production, especially if comparisons with budgets or standards are used. Attachment of costs to jobs is also necessary to price jobs that are contracted on a cost-plus basis. 

 

Last, because costs are accumulated by jobs, managers can more readily determine which jobs or types of jobs are most profitable to the organization.