Job costing is an accounting method designed to help you track the cost of individual projects and jobs. It involves looking at direct and indirect costs, and it’s usually broken into three specific categories: labor, materials and overhead. Understanding costs for a job at this level will help you better budget and plan for similar projects in the future, and you may discover some ways to cut costs or find items that should be billed to the customer.
What Is Job Costing?
Job costing is a precise method of tracking all the costs and revenue associated with a particular project. Projects might include one-off customer undertakings, manufacturing new products or delivering multiple products that will be developed at the same time.
Job costs are typically broken down into labor, materials and overhead — though each of these elements can be broken down further. For instance, labor costs might include both employee wages and third-party vendor fees. Material costs can include both direct raw materials that appear in a finished product and the indirect materials used to create the product, like equipment. Companies must carefully account for and plan around each of these elements to deliver their projects successfully and on time.
Job Costing Explained
Job costing has a few primary goals:
- Understand profit or loss of each job. Job costing looks at each element involved in a specific project so you can track profitability of each one.
- Compare to estimates. By analyzing how successfully you manage estimates, you can better price jobs in the future. The purpose of job costing is to ascertain the profit or loss made on each job.
- Uncover inefficiencies and excess costs. Things like repetitive work that could be automated or poorly allocated employee resources can be addressed in future projects.
Take the example of a construction company hired to build a high-rise for a real-estate developer. The construction company will estimate every cost and then track every charge involved in delivering the project, including material and equipment costs, team and subcontractor salaries and administrative expenses. Depending on the terms of the contract, the builder may share these details with clients so they can see the breakdown of costs. Additionally, in the future, the construction company can better quote and plan for similar projects armed with specific, real-world examples.
Why Is Accurate Job Costing Important?
One of the most impactful decision a business makes is what to charge for a product, project or service. In service industries, where the payroll costs are often the largest line item, it can be especially important to incorporate job costing. It’s one of the most important accounting practices for small businesses to reach gross profit margin goals. Accurate job costing can improve profitability, help you better manage employee scheduling and be a key component of prompt financial reporting. Proper job costing leads to better profitability, project estimating, management decisions and timely financial reporting.
Accurate job costing helps businesses strike a balance between revenue and costs on any given project by carefully analyzing each step of the job and using historical data to better inform future projects. Meticulous job costing reduces the likelihood of unexpected costs during the project life cycle, which can quickly eat into profit margins and lead to disputes with customers.
Accountants and finance departments rely on job costing for back-office processes and tax filing. For example, itemized costs help accounting teams accurately analyze how project expenses can fit into the company’s overall financial picture.
Job Costing vs. Process Costing
While related, it’s important to make the distinction between job costing and process costing. In simplest terms, job costing is a means of quantifying all of the individual costs required to deliver a unique project output like a small-scale manufacturing run.
Process costing, on the other hand, breaks down costs over a given time frame, which is particularly useful when the cost of individual units or job outputs can’t easily be differentiated.
What is process costing?
Process costing is an accounting practice by which companies assign costs to a collection of products or project outputs generated, usually within the course of a month, and use that to calculate a unit cost. Process costing is most often used by companies mass producing many identical or near-identical products at once.
For example, a manufacturer of white label rubber gaskets regularly fills orders for thousands of gaskets at once, perhaps on a recurring contract for a kitchen appliance manufacturer. Given that production costs do not vary between individual products — all of the same gaskets cost the same to produce — the gasket company can accumulate manufacturing costs over a fixed time and divide the overall figure by the number of units produced to determine a unit price.
What’s the difference between job and process costing?
Job costing requires a company to quantify all the material, labor and overhead costs required to manufacture a single job output, such as the previously mentioned construction job or a limited run of a custom item. Process costing requires businesses add all operating costs for consistent, large-scale production of similar items over time, such as white label rubber gaskets, paper straws or smartphones.
Who Uses Job Costing?
Almost any type of business that provides products or services to clients stands to benefit from job costing. The process can help you better understand your own costs for things like products, parts and even how to manage your payroll more efficiently. The practice is often associated with construction companies, as they work with a rolodex of third-party contractors and each job is different. However, job costing is gaining traction in other industries, including:
Marketing and advertising agencies: Marketing and advertising agencies must factor both direct costs and period expenses into their job costing. Period expenses refer to costs that grow over time, like rent, office supplies and utilities.
Construction companies: With complex projects that involve an enormous volume and range of materials, as well as partnerships with multiple subcontractors, construction companies rely heavily on job costing to deliver on budget and remain profitable.
Consulting firms: Working on retainer requires businesses to calculate their monthly operating and material expenses so they can clearly justify their own costs to customers. Large consultancies with tactical project teams are especially dependent on job costing to scope out their projects.
Energy utilities: Delivering energy to a city or region incurs many costs, including for staff, delivery mechanisms materials, overhead and the energy itself. Job costing is the key to staying profitable in this low-margin sector.
Engineering offices: Engineering projects frequently vary in scope and length, from one-off building designs in the case of residential engineering to multiyear consultancy and site-supervision work in the case of public construction and civil works. In all of these cases, a detailed breakdown of labor and overhead costs is crucial to accurate project scoping.
Manufacturers: In the manufacturing sector, profit margins are often defined by scale. Smaller jobs tend to require manufacturers to break even or remain profitable, even if it requires minimum order quantities to do so. Larger jobs can be priced more aggressively as profits add up when delivering many units. Job costing can help manufacturers evaluate their costs accurately and account for labor and overhead costs, not just materials.
Retailers: Retail companies increasingly sell their products online, which requires a major warehouse and inventory management operation. Added to this are the cost of building, running, and constantly improving their websites, money spent on advertising, and partnership with fulfilment and delivery partners. Job costing is ideally suited to managing this broad mix of variables and staying profitable.
Transportation and logistics providers: Logistics networks are complex and require a rigorous, accurate process to accurately cost operations. From the labor costs of drivers, to variations in delivery speed depending on the shelf-life of parcels, job costing allows these organizations to factor in all the nuances of their operations to help shape their pricing and contractual terms.
Health care and life sciences organizations: Health care institutions have a broad range of costs, such as for medical devices and equipment maintenance, salaries for physicians, nurses and support staff and vendor costs, like cafeteria and food providers.
How to Calculate Job Costing
Rather than simply analyze performance from financial documents such as income statements and balance sheets after a job is complete, job costing helps you dig deeper into more granular costs associated with specific projects or jobs. The basic formula includes adding together the costs of labor, material and overhead. But to calculate the cost of a job accurately, it takes meticulous analysis of each step and component of these three areas.
Calculate labor costs.
This is the cost of paying all the employees involved on a particular project, including third parties and subcontractors. To calculate labor costs, multiply each employee’s payroll daily rate by the number of days spent working on a specific job.
Labor costs = (Number of working days x daily pay rate x number of workers)
This calculation assumes all workers will work the same number of days and receive the same daily pay. But the formula can be performed for as many individuals or groups as needed to accommodate different pay and hours worked, and then the costs can be summed at the end.
Calculate material costs.
This includes both direct material costs (materials that comprise the finished product) and indirect material costs (materials that are required to finish the job but aren’t part of the final product). Direct costs typically include raw materials, whereas indirect costs might include things like the tools or machinery used to manufacture goods or office supplies. To calculate material costs, add all direct and indirect costs.
Overhead costs can be some of the most challenging to accurately estimate, as they require managers to break down the company’s daily operating costs and attribute the right proportion to their project. Their goal is to account for the total overhead needed to complete a project, including rent on a company’s office spaces and manufacturing facilities, electricity, internet and other business expenses. Given the difficulty, businesses sometimes apply a blanket overhead fee to each project, such as 10% per job.
Job Costing Example
Consider a luggage company that has assigned 10 employees with the task of manufacturing 20,000 new backpacks in time for the new school year. The team has four working weeks (20 business days) to complete the order. The project manager expects to work full time during that period, at a rate of $500 per day. Two warehouse managers and two supply chain managers will each work three days per week (12 days total), at a rate of $350 per day. Five plant employees will work full time to manufacture the backpacks themselves, at a rate of $200 per day.
For labor, (20 days x $500 x 1 person) + (12 days x $350 x 4 people) + (20 days x $200 x 5 people) = $46,800
Added to this are direct material costs of $20,000 for the polyester, zippers and additional fabrics used in the bags themselves, as well as indirect costs of new machinery and office supplies, which also add up to $20,000. Added together, total material cost is $40,000.
Finally, overhead costs for the four weeks are estimated at an additional $10,000. Add that to $46,800 in labor and $40,000 in materials, and altogether our project cost equals $96,800.
Benefits of Accounting Software for Job Costing
Project accounting software makes job costing easier in multiple ways, most notably by allowing businesses to break down labor costs for large and complex projects using a simple, user-friendly interface. Additionally, job costing helps automate revenue recognition and monitor and report on profitability.
Additional benefits of accounting software for job costing include the following.
Accounting software helps make the job costing easier and speeds up the process. From viewing historical costs of similar jobs, to prices of materials you’ve ordered, the software helps you categorize estimated expenses and view detail costs for each step of a job, as well as the complete picture. And when the software is part of larger enterprise resource planning (ERP) software, you have even more information at your fingertips. ERP platforms bring together modules from across the business so data, such as information from human resources, inventory management and supply chain management, all live in one digital space.
Accurate job pricing:
Job costing software can automatically assign costs to specific projects based on precise, predefined business rules, ensuring consistency and accuracy in the way they are broken down. So, for example, you could distinguish between expenses for certain marketing or sales campaigns.
Reduce customer conflict:
By accurately reporting costs, companies can make better pricing estimates and set realistic expectations for their customers. Costs can also be updated in throughout the project so you can share expense details with clients as they come in and projects progress.
Real-time cost information is a difference-maker for businesses working on high-stakes projects. With immediate insight into labor, material and overhead costs, you can perform job costing not just after the fact, but also throughout the project so you can see how it’s meeting estimates and make adjustments as needed.
Manage Job Costing With Accounting Software
Job costing is not a standalone process. It delivers the most value when project accounting software for professional services is integrated with other modules as part of a comprehensive ERP solution. These modules can include human resources, inventory planning, customer relationship management and more. Integrated software solutions make steps in the job costing process simpler with capabilities like automatically attributing employee expenses to the appropriate cost center for better and more accurate tracking. Together in one digital space, these solutions deliver more comprehensive visibility and control over projects across the business, in real time.
An integrated approach helps businesses make better use of their resources, deliver projects on time, simplify invoicing and discover ways to reduce overhead, in addition to maintaining healthy customer relationships. The latest accounting software is also highly scalable. From startups delivering niche products to enterprise players running multiple lines of business, users can more accurately run estimates and keep project costs in check. This enables teams to focus on improving productivity, efficiency and profits.
The expression “time is money” is especially relevant in the context of job costing. Increased competition, tighter project timelines and a volatile customer base have put pressure on businesses to fight for every second and every penny they can save. The first step to cost each job accurately — a task made easier with an accounting software solution.
Job Costing FAQs
Construction companies regularly rely on job costing to evaluate their projects. For instance, a construction project manager will evaluate materials costs (e.g., concrete, steel and heavy machinery needed to complete the job), labor costs (e.g., the daily rate of on-site workers) and overhead costs (e.g., rent for a temporary office on-site) to create an overall project estimate.
Job costing systems are specialized software solutions that help companies accurately estimate the costs involved in a multifaceted project. They simplify the process so that project managers can drill down into costs at the individual level and create real-time reports that can inform their future strategies.
Companies in virtually every industry can use job costing, from construction companies to marketing and advertising agencies. By developing accurate estimates of their material, labor and overhead costs, businesses can position themselves to deliver projects on budget and on time.
The fundamental aim of any business is to make a profit. Job costing helps businesses break down the relationship between revenue and costs to discover where improvements can be made. Job costing also helps provide cost estimates for customers or clients.