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:
- Calculate direct labour costs
- Calculate direct material costs
- Determine overhead or indirect costs
- 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% to 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.
