Any businessman’s work depends on distinct projects for its livelihood, and job costing is an essential step in keeping your bottom line in the black. But one would ask what is job costing, and why is it so important? Production does not take place continuously in job order industries. It only begins once the customer places a specified and customized order. Therefore, each job is different from the others. This costing method calculates the cost for each job using a Job Cost Sheet.
What is job costing?
Job costing (project-based accounting) is the process of tracking costs and revenue for an individual project and using that information as a basis for estimating the expenses associated with future projects.
Though job costing can be used to gain insight into the profitability and workflow of any business, project-based industries such as law firms, construction companies, and consulting firms will benefit most from these numbers.
Importance of job costing
Deciding what to charge for a product, project, or service is key to the overall success of your business. Even if your business doesn’t rely on distinct projects for its livelihood, job costing can reveal ways to cut expenses, improve your workflow, and increase profits in your bottom line.
Ways of calculating job costing?
Now that you know a bit about the ins and outs of job costing, let’s turn our attention to the process that makes it possible.
Here are the steps for creating an accurate and effective breakdown for any project that comes your way.
Calculating cost of labor
The first step in the process is to calculate one of the largest expenses your business is likely to face: labor.
To get to the heart of your labor expenses, you’ll need to know the Actual Hourly Labor Cost of each employee who will work on the project.
Other annual labor costs includes insurance, taxes, overtime, benefits, etc.
Calculate cost of material
Material costs are the total cost of materials used to manufacture a product, provide a service, or complete a project. You can calculate these expenses by examining financial statements from previous years and doing a deep dive into your inventory reports.
Calculating overhead
Overhead costs are recurring expenses that sustain your business but don’t contribute to income.
These costs can be divided into fixed, variable, and semi-variable expenses
How to calculate job costing
With the three key variables labor cost, material cost, and overhead, the formula for this final step is very simple:
Total Job Cost = Labor Cost + Material Cost + Overhead
As you can see, most of the hard work is done before you reach this final step, and a job costing analysis is pretty much finished when you have numbers for all three variables.
Example of a job cost estimate
Now that you’ve got the basic steps involved in job costing, let’s put the variables together in a real-world example to see how it all works.
Let’s say a mechanical keyboard manufacturer wants to win a one-time contract to make 1,000 special keyboards for a particular client and they need to figure out the job cost so they know how much to bid.
Estimation of labor cost
The manufacturer puts together a team of 10 employees and plans on giving them eight weeks (40 business days) to assemble the units.
Estimation of material cost
The keyboard manufacturer assembles everything in-house, but they need to purchase the individual components from their suppliers.
Overhead cost estimate
To round out their job costing estimate for the new project, the keyboard manufacturer includes the overhead costs it will accrue during the eight-week operation.
Overhead costs for the potential keyboard project totals $20,000.
In future project estimates, the manufacturer can either build that overtime number into the bid or take steps to control overtime throughout the business.
The manufacturer can also analyze what went into the final numbers to figure out how they can refine their workflow to be more productive.
Job costing vs. process costing
Though job costing and process costing may sound similar, they are two distinct (though still related) calculations you can use to run your business better.
As we explained earlier, it is the process of tracking costs and revenue for an individual project and using that information as a basis for estimating the expenses associated with future projects.
Process costing, on the other hand, is the practice of assigning costs to a collection of project outputs over a given time period and using that information to calculate a unit cost.
