How to Use Job Costing to Boost Profits (2024)

Job costing is an accounting method designed to help you track the cost of individualprojects and jobs. It involves looking at direct and indirect costs, and it’s usuallybrokeninto three specific categories: labor, materials and overhead. Understanding costs for a jobat this level will help you better budget and plan for similar projects in the future, andyou may discover some ways to cut costs or find items that should be billed to the customer.

What Is Job Costing?

Job costing is a precise method of tracking all the costs and revenue associated with aparticular project. Projects might include one-off customer undertakings, manufacturing newproducts or delivering multiple products that will be developed at the same time.

Job costs are typically broken down into labor, materials and overhead — though each oftheseelements can be broken down further. For instance, labor costs might include both employeewages and third-party vendor fees. Material costs can include both direct raw materials thatappear in a finished product and the indirect materials used to create the product, likeequipment. Companies must carefully account for and plan around each of these elements todeliver their projects successfully and on time.

Job Costing Explained

Job costing has a few primary goals:

1. Understand profit or loss of each job. Job costing looks at each element involved in aspecific project so you can track profitability of each one.
2. Compare to estimates. By analyzing how successfully you manage estimates, you can betterprice jobs in the future. The purpose of job costing is to ascertain the profit or lossmade on each job.
3. Uncover inefficiencies and excess costs. Things like repetitive work that could beautomated or poorly allocated employee resources can be addressed in future projects.

Take the example of a construction company hired to build a high-rise for a real-estatedeveloper. The construction company will estimate every cost and then track every chargeinvolved in delivering the project, including material and equipment costs, team andsubcontractor salaries and administrative expenses. Depending on the terms of the contract,the builder may share these details with clients so they can see the breakdown of costs.Additionally, in the future, the construction company can better quote and plan for similarprojects armed with specific, real-world examples.

Why Is Accurate Job Costing Important?

One of the most impactful decision a business makes is what to charge for a product, projector service. In service industries, where the payroll costs are often the largest line item,it can be especially important to incorporate job costing. It’s one of the mostimportant accounting practices forsmall businesses to reach gross profit margin goals. Accurate job costing canimprove profitability, help you better manage employee scheduling and be a key component ofprompt financial reporting. Proper job costing leads to better profitability, projectestimating, management decisions and timely financial reporting.

Accurate job costing helps businesses strike a balance between revenue and costs on any given project by carefullyanalyzing each step of the job and using historical data to better inform future projects.Meticulous job costing reduces the likelihood of unexpected costs during the project lifecycle, which can quickly eat into profit margins and lead to disputes with customers.

Accountants and finance departments rely on job costing for back-office processes and taxfiling. For example, itemized costs help accounting teams accurately analyze how projectexpenses can fit into the company’s overall financial picture.

Video: What Is Job Costing?

Job Costing vs. Process Costing

While related, it’s important to make the distinction between job costing and processcosting. In simplest terms, job costing is a means of quantifying all of the individualcosts required to deliver a unique project output like a small-scale manufacturing run.

Process costing, on the other hand, breaks down costs over a given time frame, which isparticularly useful when the cost of individual units or job outputs can’t easily bedifferentiated.

What is process costing?

Process costing is an accounting practice by which companies assign coststo a collection of products or project outputs generated, usually within the course of amonth, and use that to calculate a unit cost. Process costing is most often used bycompanies mass producing many identical or near-identical products at once.

For example, a manufacturer of white label rubber gaskets regularlyfills orders for thousands of gaskets at once, perhaps on a recurring contract for a kitchenappliance manufacturer. Given that production costs do not vary between individual products— all of the same gaskets cost the same to produce — the gasket company canaccumulatemanufacturing costs over a fixed time and divide the overall figure by the number of unitsproduced to determine a unit price.

What’s the difference between job and process costing?

Job costing requires a company to quantify all the material, labor andoverhead costs required to manufacture a single job output, such as the previously mentionedconstruction job or a limited run of a custom item. Process costing requires businesses addall operating costs for consistent, large-scale production of similar items over time, suchas white label rubber gaskets, paper straws or smartphones.

Who Uses Job Costing?

Almost any type of business that provides products or services to clients stands to benefitfrom job costing. The process can help you better understand your own costs for things likeproducts, parts and even how to manage your payrollmore efficiently. The practice is often associated with construction companies, as they workwith a rolodex of third-party contractors and each job is different. However, job costing isgaining traction in other industries, including:

• Marketing and advertising agencies: Marketing and advertisingagencies must factor both direct costs and period expenses into their job costing.Period expenses refer to costs that grow over time, like rent, office supplies andutilities.

• Construction companies: With complex projects that involve anenormous volume and range of materials, as well as partnerships with multiplesubcontractors, construction companies rely heavily on job costing to deliver onbudget and remain profitable.

• Consulting firms: Working on retainer requires businesses tocalculate their monthly operating and material expenses so they can clearly justifytheir own costs to customers. Large consultancies with tactical project teams areespecially dependent on job costing to scope out their projects.

• Energy utilities: Delivering energy to a city or region incurs manycosts, including for staff, delivery mechanisms materials, overhead and the energyitself. Job costing is the key to staying profitable in this low-margin sector.

• Engineering offices: Engineering projects frequently vary in scopeand length, from one-off building designs in the case of residential engineering tomultiyear consultancy and site-supervision work in the case of public constructionand civil works. In all of these cases, a detailed breakdown of labor and overheadcosts is crucial to accurate project scoping.

• Manufacturers: In the manufacturing sector, profit margins are oftendefined by scale. Smaller jobs tend to require manufacturers to break even or remainprofitable, even if it requires minimum order quantities to do so. Larger jobs canbe priced more aggressively as profits add up when delivering many units. Jobcosting can help manufacturers evaluate their costs accurately and account for laborand overhead costs, not just materials.

• Retailers: Retail companies increasingly sell their products online,which requires a major warehouse and inventory management operation. Added to thisare the cost of building, running, and constantly improving their websites, moneyspent on advertising, and partnership with fulfilment and delivery partners. Jobcosting is ideally suited to managing this broad mix of variables and stayingprofitable.

• Transportation and logistics providers: Logistics networks arecomplex and require a rigorous, accurate process to accurately cost operations. Fromthe labor costs of drivers, to variations in delivery speed depending on theshelf-life of parcels, job costing allows these organizations to factor in all thenuances of their operations to help shape their pricing and contractual terms.

• Health care and life sciences organizations: Health careinstitutions have a broad range of costs, such as for medical devices and equipmentmaintenance, salaries for physicians, nurses and support staff and vendor costs,like cafeteria and food providers.

How to Calculate Job Costing

Rather than simply analyze performance from financial documents such as income statements and balance sheets after a job is complete, job costinghelps you dig deeper into more granular costs associated with specific projects or jobs. Thebasic formula includes adding together the costs of labor, material and overhead. But tocalculate the cost of a job accurately, it takes meticulous analysis of each step andcomponent of these three areas.

• Calculate labor costs.

  This is the cost of paying all the employees involved on aparticular project, including third parties and subcontractors. To calculate laborcosts, multiply each employee’s payroll daily rateby the number of days spent working on a specific job.

  Labor costs = (Number of workingdays x daily pay rate x number of workers)

  This calculation assumes all workers will work the same number of days and receivethe same daily pay. But the formula can be performed for as many individuals orgroups as needed to accommodate different pay and hours worked, and then the costscan be summed at the end.

• Calculate material costs.

  This includes both direct material costs (materials that comprisethe finished product) and indirect material costs (materials that are required tofinish the job but aren’t part of the final product). Direct costs typicallyincluderaw materials, whereas indirect costs might include things like the tools ormachinery used to manufacture goods or office supplies. To calculate material costs,add all direct and indirect costs.

• Calculate overhead.

  Overhead costs can be some of the most challenging to accuratelyestimate, as they require managers to break down the company’s daily operatingcostsand attribute the right proportion to their project. Their goal is to account forthe total overhead needed to complete a project, including rent on a company’soffice spaces and manufacturing facilities, electricity, internet and other businessexpenses. Given the difficulty, businesses sometimes apply a blanket overhead fee toeach project, such as 10% per job.

Job Costing Example

Consider a luggage company that has assigned 10 employees with the task of manufacturing20,000 new backpacks in time for the new school year. The team has four working weeks (20business days) to complete the order. The project manager expects to work full time duringthat period, at a rate of $500 per day. Two warehouse managers and two supply chain managerswill each work three days per week (12 days total), at a rate of $350 per day. Five plantemployees will work full time to manufacture the backpacks themselves, at a rate of $200 perday.

For labor, (20 days x $500 x 1 person) + (12 days x $350 x 4 people) + (20 days x $200 x 5people) = $46,800

Added to this are direct material costs of $20,000 for the polyester, zippers and additionalfabrics used in the bags themselves, as well as indirect costs of new machinery and officesupplies, which also add up to $20,000. Added together, total material cost is $40,000.

Finally, overhead costs for the four weeks are estimated at an additional $10,000. Add thatto $46,800 in labor and $40,000 in materials, and altogether our project cost equals$96,800.

Benefits of Accounting Software for Job Costing

Project accounting software makes job costing easier in multiple ways, most notably byallowing businesses to break down labor costs for large and complex projects using a simple,user-friendly interface. Additionally, job costing helps automate revenue recognition andmonitor and report on profitability.

Additional benefits of accounting software for job costing include the following.

• Timely estimations:

  Accounting software helps make the job costing easier and speeds upthe process. From viewing historical costs of similar jobs, to prices of materialsyou’ve ordered, the software helps you categorize estimated expenses and viewdetailcosts for each step of a job, as well as the complete picture. And when the softwareis part of larger enterprise resource planning (ERP) software, you have even moreinformation at your fingertips. ERP platforms bring together modules from across thebusiness so data, such as information from human resources, inventory management andsupply chain management, all live in one digital space.

• Accurate job pricing:

  Job costing software can automatically assign costs to specificprojects based on precise, predefined business rules, ensuring consistency andaccuracy in the way they are broken down. So, for example, you could distinguishbetween expenses for certain marketing or sales campaigns.

• Reduce customer conflict:

  By accurately reporting costs, companies can make better pricingestimates and set realistic expectations for their customers. Costs can also beupdated in throughout the project so you can share expense details with clients asthey come in and projects progress.

• Real-time reporting:

  Real-time cost information is a difference-maker for businessesworking on high-stakes projects. With immediate insight into labor, material andoverhead costs, you can perform job costing not just after the fact, but alsothroughout the project so you can see how it’s meeting estimates and makeadjustments as needed.

Manage Job Costing With Accounting Software

Job costing is not a standalone process. It delivers the most value when project accounting softwarefor professional services is integrated with other modules as part of acomprehensive ERP solution. These modules can include human resources, inventory planning,customer relationship management and more. Integrated software solutions make steps in thejob costing process simpler with capabilities like automatically attributing employeeexpenses to the appropriate cost center for better and more accurate tracking. Together inone digital space, these solutions deliver more comprehensive visibility and control overprojects across the business, in real time.

An integrated approach helps businesses make better use of their resources, deliver projectson time, simplify invoicing and discover ways to reduce overhead, in addition to maintaininghealthy customer relationships. The latest accounting software is also highly scalable. Fromstartups delivering niche products to enterprise players running multiple lines of business,users can more accurately run estimates and keep project costs in check. This enables teamsto focus on improving productivity, efficiency and profits.

Conclusion

The expression “time is money” is especially relevant in the context of jobcosting.Increased competition, tighter project timelines and a volatile customer base have putpressure on businesses to fight for every second and every penny they can save. The firststep to cost each job accurately — a task made easier with an accounting softwaresolution.

Job Costing FAQs

What is an example of job costing?

Construction companies regularly rely on job costing to evaluate their projects. Forinstance, a construction project manager will evaluate materials costs (e.g., concrete,steel and heavy machinery needed to complete the job), labor costs (e.g., the daily rate ofon-site workers) and overhead costs (e.g., rent for a temporary office on-site) to create anoverall project estimate.

What are job costing systems?

Job costing systems are specialized software solutions that help companies accuratelyestimate the costs involved in a multifaceted project. They simplify the process so thatproject managers can drill down into costs at the individual level and create real-timereports that can inform their future strategies.

Who uses job costing?

Companies in virtually every industry can use job costing, from construction companies tomarketing and advertising agencies. By developing accurate estimates of their material,labor and overhead costs, businesses can position themselves to deliver projects on budgetand on time.

What is the importance of job costing?

The fundamental aim of any business is to make a profit. Job costing helps businesses breakdown the relationship between revenue and costs to discover where improvements can be made.Job costing also helps provide cost estimates for customers or clients.