Job Costing: The Complete Guide For Business Owners

Job costing charts

Regardless of the size and type of business you run, job costing is an essential part of keeping your bottom line in the black and your team on the road to success.

But, what exactly is a job costing analysis? Why is it important? And what goes into determining those numbers?

In this article, we discuss the answers to those questions and introduce you to a tool that can help you produce the best job costing possible.

Table Of Contents

Job Costing Defined

Meeting on job costing

Job costing (a.k.a. job order costing, project-based accounting, or job costing analysis) is the process of tracking costs and revenue for an individual project and using that information as a basis for estimating the expenses associated with future projects.

The three main costs involved in this process are:

  • Materials
  • Labor
  • Overhead

Each of these main costs can be further subdivided into sub-costs for more accurate accounting.

For example, you might choose to include third-party vendor fees along with your business’s employee wages when calculating labor for your job costing.

Or, you might choose to include all the indirect materials used to create your product (e.g., equipment) along with all the direct materials when calculating materials for your job costing.

It all depends on what information you want from the analysis and the goals you have for all current and future projects. In essence, it comes down to this simple adage: what you put in affects what you get out.

Primary Goals Of Job Costing

Once you understand the process, you can set all manner of goals for your job costing analysis.

That said, there are three primary goals that form the foundation of everything else. They are:

  • Determine profit and loss
  • Uncover inefficiencies and excess costs
  • Provide numbers to compare with project estimates

Armed with those final numbers, your business will be better equipped to make more accurate estimates and control costs for all future projects.

The Importance Of Job Costing

Charts calculating job costing

As we touched on in the previous section, one of the most important aspects of job costing is producing accurate estimates and controlling costs for future projects.

Why is this essential for success?

Because knowing what to charge for a project, product, or service can mean the difference between profit and loss on your accounting sheets.

But this isn’t the only reason job costing is important for businesses large and small.

An accurate analysis of what goes into business operations provides a number of benefits you can’t find anywhere else, including:

Even if your workflow isn’t based on distinct projects, job costing can reveal ways to cut costs, improve the way your team works, and keep your bottom line in the black.

Job Costing Calculation

Job Costing Calculation

Job costing is fairly straightforward and, as we mentioned at the beginning of this article, includes three primary components: labor, materials, and overhead.

Here’s how to use those components to create your own project analysis.

1) Calculate Material Costs

As the name suggests, material costs are what you pay for everything used to complete a project, manufacture a product, or provide a service.

This first step is simply a matter of examining your records — financial statements, inventory reports, work orders, etc. — and then adding up all the expenses associated with materials you used on previous projects (and will likely use on future projects).

For example, after going through your records, you estimate that your business spent $30,000 in material costs on a previous project. We’ll come back to this number in step four of our calculation.

For now, it’s up to you how deep into the figures you want to go and what exactly to include in the final number.

Some businesses only want the raw materials used to produce their product, while other businesses also include money spent on the machines that did the actual work.

Keep in mind that for a truly accurate job costing, whatever you include in the analysis now, you’ll also need to include in any future analyses as well.

2) Calculate Labor Costs

The second step in your job costing analysis is to calculate the labor costs associated with your project, product, or service.

The final number you’re looking for is actual hourly labor cost. You’re going to need to crunch a lot of other numbers and wade through a number of formulas to get there, but it’s really not as bad as it seems.

Here are the formulas:

Gross Pay = Pay Rate x Gross Hours
Hours Not Worked = Days Missed Per Year x Number Of Hours In A Shift
Net Hours Worked = Gross Hours – Hours Not Worked
Annual Payroll Labor Cost = Gross Pay + Other Annual Costs
Actual Hourly Labor Cost = Annual Payroll Labor Cost / Net Hours Worked

Let’s walk through these for a single employee (we’ll call him Tom) working on the project you’re job costing.

Tom works 2,080 hours per year (full time) at a rate of $25/hour. His Gross Pay is $52,000 (Pay Rate x Gross Hours).

In 2021, Tom received 40 hours of time off (Hours Not Worked) for holidays, vacation days, and the like. For the project coming up at the end of 2022, you can estimate that Tom will take off the same number of hours so that his Net Hours Worked will be 2,040 (Gross Hours – Hours Not Worked).

Next, add together all the other annual costs associated with paying Tom, such as benefits, taxes, and insurance. For this example, that comes out to $2,000.

Add $2,000 to Tom’s Gross Pay, and you find that his Annual Payroll Labor Cost is $54,000.

Finally, take Tom’s Annual Payroll Labor Cost and divide it by his Net Hours Worked to reach his Actual Hourly Labor Cost.

Actual Hourly Labor Cost = Annual Payroll Labor Cost / Net Hours Worked
Actual Hourly Labor Cost = $54,000 / 2,040
Actual Hourly Labor Cost = $26.47

With that number in mind, you can produce an accurate estimate of what your labor costs will be for any upcoming projects on which Tom works.

3) Calculate Overhead

Overhead costs are regular expenses that keep your business running but don’t contribute to income.

These costs include such fixed, variable, and semi-variable expenses as:

  • Rent
  • Insurance
  • Property taxes
  • Shipping
  • Advertising
  • Wages
  • Overtime
  • Vehicle use

To calculate overhead, add up all the overhead expenses your business accrues in one month. From there, multiply that figure by the number of months you think the new project will last.

For example, let’s say that your business spends $5,000 per month on overhead, and the new project will last for six months. You can estimate that total overhead costs for the new project will be at least $30,000.

4) Calculate Job Costing

Gather the numbers from the previous three sections — material cost, labor cost, and overhead cost — and use them here to calculate job costing.

The formula for that process is:

Total Job Cost = Material Cost + Labor Cost + Overhead

At this point, you’ve already done most of the hard work, and the only thing left to do is add the numbers together to get the total cost for the project.

To keep things as simple as possible, we’ll assume that only one employee, Tom, is working on this project. If other employees will participate, you’ll need to calculate their Actual Hourly Labor Cost (step #2) and add it to Tom’s number.

With all of the information from the previous sections, here’s how the numbers work out. For this example, we’ll assume that Tom’s estimated work hours on the project will be around 1,080 (40 hours per week x six months).

Total Job Cost = Material Cost + Labor Cost + Overhead
Total Job Cost = $30,000 + ($26.47 x 1080) + $30,000
Total Job Cost = $30,000 + $28,587.60 + $30,000
Total Job Cost = $88,587.60
Total Job Cost = $88,588

So, according to this job costing, you would need to charge $88,588 just to break even.

Add in 10% or more for profit, and you’ve got yourself a complete estimate you can present to your client.

Control Labor And Job Costing With Inch

Control Labor And Job Costing With Inch

How can you control labor and job costing in one fell swoop? With Inch.

The Inch suite of tools gives you the ability to organize and optimize your workforce for maximum efficiency and productivity.

Inch also serves as a time clock for your business through which you can set up a central clock-in/clock-out location or allow your distributed team to record their time from any mobile device (smartphone, tablet, or laptop).

And, with Inch’s powerful geofencing feature, you can prevent early clock-ins, not-on-site clock-ins, and missed clock-outs with only a few clicks.

For more free resources to help you manage your business better, organize and schedule your team, and track and calculate labor costs, visit today.

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