Job costing is the process of adding together the materials, labour, and overhead related to a job. A job can be the manufacture of a specific product or a project for a client. To explain, imagine your construction company builds a home for a client. The materials and payroll hours devoted to the project are your direct material and labour costs. When you start the project, you make projections about these expenses to create an estimate. However, the costs are not fixed and may fluctuate throughout the project. You can track job costs manually, but to make it easier, you may want to look into job costing software or accounting software with built-in job costing tools. These systems let you enter expenses and categorize them by the job or client involved. Tracking overhead can be trickier. Overhead includes office rent, utilities, administrative costs, and all other expenses not directly related to a project. However, you may want to allocate those costs on a job-by-job basis so you can account for them when setting your rates. For instance, imagine you are working on two projects over a three-month period. The first project takes up 25% of your time and resources, while the second project takes up 75%. As a result, 75% of your overhead during that period can be allocated to the second project and 25% to the first project. Job costing is primarily used in manufacturing and construction, but anyone who works for clients may utilize job costing.
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