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Job costing guide: Definition, how to calculate, and best practices

Tracking the costs associated with any given task or project is an essential part of any successful business’s accounting process. Job costing allows you to get a better idea of how much each specific project costs, and helps you estimate the costs of similar projects in the future. Let’s take a deeper look at what job costing is and how to calculate it effectively.

What is job costing?

The difference between job costing and process costing

How to calculate job costing

Job costing example

3 tips for more accurate job costing

What is job costing?

Job costing, also known as project-based accounting, is an accounting method used for tracking the cost and profitability of individual projects or “jobs” within a business. 

Job costing is commonly used in project-based businesses such as construction companies, advertising and marketing agencies, medical offices, law firms, and more. 

When generated accurately, job costing can provide a number of benefits to these types of small businesses. 

What is the importance of job costing?

The benefits and goals of job costing include:  

  • Generate accurate cost estimates 
  • Create accurate financial projections and invoicing 
  • Improve the profitability of business activities
  • Maintain profit margin goals 
  • Better manage employee time and tracking
  • Uncover inefficiencies and avoid future unexpected costs

The difference between job costing vs process costing

Where job costing is used to track the specialised, short-run production of a job, process costing is used to track the cost of mass-produced identical units. 

Process costing could be used, for example, to track the cost of each identical pack of gum produced over the course of 6 production months. 

Process cost is determined by taking the total cost of the project and dividing it by the number of products produced. 

Process cost = total project cost ÷ number of products produced

How to calculate job costing 

Job costing is calculated by adding the labour, materials, and overhead costs of a particular job and utilises time tracking and project codes to create the report. The formula will look something like this: 

Total job cost = cost of labour + cost of materials + applied overhead

In terms of process steps you could break it down into:

  1. Calculate direct labour costs
  2. Calculate direct material costs
  3. Determine overhead or indirect costs
  4. Add direct labour, direct materials, and overhead costs to find the total job cost

Now let’s break down what each of these costs entail. 

1. Calculate direct labour costs 

Direct labour costs are the wages paid to employees working directly on the job. Direct labour can be determined using the following formula:

Labour costs = Number of working days x daily pay rate x number of workers

Wages for employees working indirectly on a project (supervisors, custodians, etc.) should be tracked under overhead costs.

2. Calculate direct material costs

Material costs are all costs directly related to the material or service being sold. Material costs make up anywhere from 50%–70% of the total job cost, making them the most important aspect of any job costing report.

Examples of material costs: 

  • The cost of wood used for furniture 
  • The cost of cotton used for cotton yarn 
  • The cost of plastic used for a calculator 

3. Determine overhead

Overhead costs are any indirect labour or materials involved in the project or job. These are costs that involve the process and production of the product, but are not necessarily part of the final product itself. 

Examples of overhead costs:  

  • Daily operating costs 
  • Machine setup 
  • Product packaging 
  • Electricity used for the machines 
  • Building rent 
  • Quality assurance workers wages

Because these costs are indirect to the project itself, overhead costs are the most difficult to track. 

A predetermined overhead rate is an allocation rate used in place of specific overhead costs to make overhead easier to account for. 

To calculate your predetermined overhead rate, simply divide the estimated overhead by the estimated activity cost. 

Predetermined overhead rate = estimated overhead ÷ estimated activity cost

The predetermined overhead rate can be applied to all other jobs and reconciled for actual costs at the end of the financial year.

4. Find the total job cost 

Once you’ve calculated your direct labour, direct materials, and overhead costs, simply add them together to find the total job cost. Let’s view an example of how this looks in practice. 

Job costing example

A construction company wants to estimate the cost of a building project that will take 10 days to complete. They plan to have 3 workers working on the project that will be paid $200 per day, per worker, over the course of 10 days. 

A supervisor will also be paid a flat rate of $3,500 for the entire project. 

They estimate the project will cost $5,000 in lumber and $1,000 in hardware and they use a predetermined overhead rate to estimate $2,000 in estimated overhead. 

Direct labour costs: 

First, they’ll calculate their direct labour costs:

  • Construction worker pay:  (3 workers) x (10 days) x ($200) = $6,000 

  • Supervisor pay: = $3,500

Total labour: $6,000 + $3,500 = $9,500

Direct material costs:

Next, they’ll add the direct material costs:

Total materials: $5,000 of lumber + $1,000 of hardware = $6,000

Total job cost: 

Lastly, they’ll add direct labour, materials and estimated overhead to calculate the total job cost: 

Direct labour ($9,500) + direct materials ($6,000) + estimated overhead ($2,000) = $17,500

The total job cost for this project would be $17,500 

3 tips for more accurate job costing

See some job costing best practices to keep in mind below:

1. Assign cost codes

Cost codes, also known as project codes, are a sequence of numbers assigned to certain tasks or items of a project. Cost codes can be applied to specific costs that are used over several different projects in order to create more organised accounting. 

2. Implement mobile time tracking

Mobile time tracking allows employees to track time on scheduled jobs, giving your team valuable insight into how much each task costs. 

Benefits of mobile time tracking include:

  • View who’s working on what with GPS tracking 
  • Gain immediate insight into cost inefficiencies 
  • View real-time labour tracking 
  • Schedule future jobs 
  • Predict future job estimates 

3. Utilise accounting and payroll software 

The more granular you can get with individual costs, the better you’ll be able to predict costs in the future. And with all of the moving parts of job costing, it can be time-consuming and confusing to perform the work on your own. Payroll and accounting software can be used to generate labour costs and expenses for you, so you don’t have to spend time crunching the numbers.

Jumpstart your job costing reports

Whether you’re ready to begin the job costing process on your own or you’re in need of some extra help, QuickBooks Online can help. QuickBooks Online is an easy-to-use accounting software that tracks and organises all of your finances in one place. Easily generate job costing reports by allowing QuickBooks to automatically track and store the data you need. Learn more about QuickBooks Online or get started on job costing with QuickBooks today!