What Is Job Costing?
When it comes to running a small business, an accurate accounting system is one of the most important factors influencing success. Failing to correctly track your debts, income, and expenses makes it challenging to know when your projects are going over budget, find avenues for correcting budgeting issues, and ensure the business stays on financial track.
The job costing system offers one accounting solution for businesses to know how much particular jobs cost and compare that to the income generated. Bookkeepers can use the system to help businesses maintain their cash flow.
Job costing works best when the company produces products to fill unique orders for the customer or client because the system monitors the costs associated with a specific job. For jobs that produce a lot of similar products and work less on a job-by-job basis, process costing can provide better accounting tools and strategies.
We'll break down job costing so those interested in implementing this system can see how it can work for them.
What Is Job Costing?
In bookkeeping, job costing describes an accounting system that adds together the total costs associated with a particular job. It generally totals labor costs, material costs, and overhead costs to determine the total associated with a single project.
Once the project is finished and sold, the costs calculated can be transferred to the "cost of goods sold (COGS)" accounting list. This can then be monitored, compared to other individual jobs and the final actual costs of the project, and analyzed over several projects to better understand profit margins, opportunities for efficiency, and the financial health of the company.
Job costing can be called job order costing or project-based accounting. Both terms also refer to the tallying of the costs associated with a specific job.
Who Uses Job Costing?
Various industries can utilize job costing to help them better understand the costs associated with a particular task or order. As opposed to process costing systems — which track costs by processing department — job costing systems look at costs by specific job. Businesses that produce unique products or jobs based on customer orders can use this system to better understand what goes into producing their finished product, helping them ensure it lines up with the revenue they generate from the task.
Given the value of job costing, particularly for small businesses, it can be used in a number of industries. Specifically, it offers considerable value for:
- Construction companies
- Advertising industries
- Software designers
- Law firms
- Film studies
How Do You Calculate Job Costing?
Calculating job cost requires adding together the cost of the direct materials, labor, and applied overhead for the project. The formula for the equation looks like this:
|+ Direct Labor|
|+ Applied Overhead|
|Total Job Cost|
For small businesses interested in simplifying and improving their accounting, this calculation can easily be run through Skynova's accounting software. By helping businesses gather all of the relevant information, they can quickly determine their direct costs and compare it to their revenue for the task.
To run this equation, as you can see, you'll need to know your labor costs, material costs, and overhead costs. Here is how you can gather this data quickly and simply.
Determine Labor Costs
Labor costs refer to the amount that you spent on employees or contractors needed to complete a specific job. If you run a construction company and have a job that consists of building a house addition for a client, for instance, you'll look at the number of people you employed specifically for this project and their hourly rate to determine the amount you spent on labor.
If you're estimating labor costs ahead of time, you'll want to look at the number of people and hours they needed to work on similar jobs in the past. This will help you develop a better idea of how much you'll likely pay for labor.
Calculate Material Costs
The material costs apply to what your company was required to secure for the project. You'll want to consider everything you had to buy to successfully complete the project. For construction industry projects, this would include everything from the drywall and lumber required to the smallest screws.
With Skynova, businesses can track their material expenses easily by recording their receipts and using the general ledger features to record what they purchased. This makes it easy to tally up material costs.
Calculate Overhead Costs
As a business owner, you'll have to consider your overhead costs. For example, you might have rent or mortgage payments for your business location, insurance for your company, administrative costs, and tools or equipment. This can be the hardest part of the equation to calculate since these costs don't get applied to a specific job. You'll need to divide everything up in a logical way between all projects for the year. Each business will need to determine a system for allocating a certain percentage of their overhead costs to a given job.
Some businesses find that the best system is to use information from past jobs to determine the overhead rate for a particular unit of activity. They can then use this standardized rate to create overhead charges based on the number of units of activity that this particular job requires.
In other words, if they find that their construction company has an estimated 15,000 direct labor hours throughout the year, they can divide their estimated overhead costs for the year by that amount and determine how much they need to charge for overhead per hour of labor. Others might choose to charge a flat rate per job, such as 10% of their overhead cost.
Calculate the Total Job Cost
Once you've determined your material costs, labor costs, and how much you'll charge for your overhead, the time has come to calculate the total cost of the job. This can be done by adding the numbers together. Remember that the formula is:
|+ Direct Labor|
|+ Applied Overhead|
|Total Job Cost|
Examples of Job Costing
Now that we've gone through the formula of calculating the job cost, let's walk through some examples to see how this will work for a real company and how it might impact their pricing.
Construction company A prepares to help a client put an addition on their house. They want to calculate the job cost to help them track their budgeting and spending.
To calculate the job cost, they determined they will need four employees working for a total of 100 hours each at $16 per hour. They will also need to spend $10,000 on materials. Finally, they have calculated their overhead and know they need to charge $4 per man-hour.
- 4 x 100 x $16 to determine the labor cost
- $10,000 for the material cost
- $4 x 4 x 100 for the overhead cost
This comes to $6,400 + $10,000 + $1,600. Altogether, that equals $18,000 for the job cost. The construction company will need to ensure its revenue covers this cost.
An advertising company agrees to produce a specific campaign for a client. Over the course of the project, they use six employees who've worked for a total of 30 hours each at an hourly rate of $30.
Based on the equipment needed to produce the campaign, the team will spend $4,000 on materials. They've also calculated their overhead cost to be $8 per hour worked. To calculate their job cost, they'll need to run the following calculation:
- 6 x 30 x $30 to determine the labor cost
- $4,000 for the material cost
- $8 x 6 x 30 for the overhead cost
This comes to $5,400 + $4,000 + $1,440, or $10,840 for the job cost. The ability to cover this cost is crucial to the company's bottom line.
Keep Track of Your Costs Using Skynova
For many businesses, tracking job costs can offer valuable insight into the cost of their projects and how they can improve their budgeting and spending. Understanding how to use this measurement can help more companies improve their business accounting and find new opportunities to improve efficiency and profitability.
Those who want to utilize job cost will find that turning to Skynova's accounting software can simplify the process since it's designed for small businesses. This software includes straightforward features and an easy navigation layout. Skynova also offers a full range of business templates and software products. See how Skynova's products can help your business grow.
Notice to the Reader
The content within this article is meant to be used as general guidelines for cost management and may not apply to your specific situation. Always consult with a professional accountant to ensure you're meeting accounting standards.