In accounting, job costing is a process that allows businesses to track the costs associated with individual tasks or jobs. There are three main components that make up the total ‘cost’ of a job, which we’ll outline below.
What is job costing?
Job costing is an accounting tool used by businesses of all sizes. Although often associated with construction and manufacturing, this method can be applied to any business that commissions tasks or individual projects.
It’s also known as project-based accounting, describing the process of tracking associated costs for each project. The costs of a job are broken down in detail, based on factors like cost of labour and materials.
How to calculate job costing
There are three components that must be added together in job costing. These include:
Labour costs include wages paid to all employees and contractors working on the project. This may incur an hourly or day rate. To calculate labour for job costing purposes, an accountant will multiply the day rate by the estimated time frame until completion. Working with subcontractors requires separate quotes, which are added into the overall job cost.
Another component of job costing is the direct cost of materials. These will vary according to the industry involved, but for example in construction would include everything from large machinery to small pieces like nails and screws.
While labour and materials are both direct costs, overhead is more difficult to calculate as an indirect cost. For budgeting purposes, businesses often apply a blanket overhead percentage to the project. Another option is to calculate a predetermined overhead rate using estimates of anticipated activity. These estimated overhead costs include factors like administration, depreciation of any equipment used, and cost of office space.
Put these three components together, and the job costing formula is:
Total Job Cost = Cost of Labour + Cost of Materials + Applied Overhead
Job costing forms will have spaces for accountants to input labour, materials, and overhead. While the job is in process, these costs are noted in a work-in-process account. After completion, the costs can be transferred over to a finished goods account. This helps accountants keep track of complicated jobs at various stages of completion.
Job costing examples
It’s associated with the construction industry, but job costing is used in everything from accounting companies to law firms. As a result, job costing examples are seen in a variety of industries. For an example of job costing, use the following scenario.
A law firm uses this accounting method for each client case.
The cost of billable labour hours for this case is £10,000.
The cost of associated materials for the case is £1,500.
Using estimates, the firm determined that the overhead cost for the job was £3,500.
According to the job costing formula:
Direct Materials (£1,500) + Direct Labour (£10,000) + Estimated Overhead (£3,500) = £15,000
The total job cost for this case would be £15,000.
Job costing techniques
Due to the level of detail involved in job costing, it’s a method that carries over into budgeting and forecasting. Business owners can use the same job costing techniques to evaluate past projects on a line-by-line basis. These evaluations carry over into the future, as it’s possible to see where costs might be reduced next time.
Tallying up the direct costs of labour and materials is straightforward for accountants. There is some more room for variation when it comes to estimating overhead. To keep the books consistent, it’s common to use historical cost information to create a standard rate per unit of activity.
Cost accountants also often manage multiple jobs at once, making it necessary to compare current costs to financial projections. If predicted costs aren’t in alignment, the accountant can give management fair warning to try and get the budget back on track.
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