This video shows how to use job-order costing for service companies.

A company that provides services does not have inventory or cost of goods sold; thus, it isn’t technically required to use job-ordering costing or any other cost system. However, many service companies use job-order costing to help control costs. For example, a law firm might track costs for each legal case it handles.

Service companies charge direct costs and allocate indirect costs to a job. With a law firm, direct costs would be anything that is clearly traceable to the job (e.g., an hourly rate for a lawyer who worked on that specific case for a set amount of time) while indirect costs would be any support costs (e.g., the cost of administrative staff). To allocate indirect costs to jobs, the indirect costs are added up and divided by an activity base (e.g., the number of lawyer-hours billed to the job).