Job costing lets you add together materials, labour, and overhead costs related to projects so you can better track expenses for new projects. Because your expenses for novel products tends to fluctuate, the job costing method requires you to track expenses in a work-in-progress account until you complete the job and then transfer the total to a finished goods account. Using this method can help you sort through complex details for specific jobs and better estimate your levels of success and profit.
Uses for Job Costing
Primarily used in manufacturing and construction but helpful for any small business with clients, job costing proves especially useful when you have a limited amount of time and must choose between different projects. Additionally, it comes in handy when you need to create estimates for clients. Though many costs for new products fluctuate, job costing can still help you make better informed cost projections, giving you room to add in a profit margin so you earn money for your work. Additionally, when creating products in house, job costing makes it simple to compare how much each one of your items costs to make and maintain.
Ways to Track Job Costing
You can track job costs manually, but accounting software such as QuickBooks Online with built-in job costing tools can make it easier to keep accurate track of your expenses. These apps let you enter expenses and categorize them by the job or client, and they work well for industries where clients choose from lots of add-on services.
Job Costing Elements
Regardless of whether you select manual or computer-aided tracking, job costing requires you to know the cost of your materials, labour, and overhead. Of these costs, tracking overhead often proves the trickiest to nail down as it includes office rent, utilities, and administrative expenses plus other costs not directly related to your project. Many small businesses allocate these costs on a job-by-job basis to account for allocating overhead when setting their rates.
Job Costing Example
Let’s say your company has two projects in the works over a three-month period and have overhead costs of $100,000 during that period. The first project has $15,000 in materials and $10,000 in labour costs plus it takes up 25% of your time. On the other hand, the second project has $50,000 in materials and $25,000 in labour costs plus it takes up 75% of your time. As a result, you can allocate 75% of your overhead, or $75,000, to the second project and 25% of your overhead, or $25,000 to the first project. Now that you know your overhead, you can perform job costing for the two projects:
- Project one: $15,000 in materials + $10,000 in labour + $25,000 in overhead = job costing of $50,000
- Project two: $50,000 in materials + $25,000 in labour + $75,000 in overhead = job costing of $150,000
Job costing gives you a good idea of project expenses so you can make better financial decisions and reduce risks of selling yourself short to clients and customers. Though you can typically perform calculations manually, having excellent accounting software such as QuickBooks makes it easier to track your job costing expenses and make future projections based on past data. Over 4.3 million customers use QuickBooks. Join them today to help your business thrive for free.