December 3, 2021

How Job Costing Works – businessnewsdaily.com

How Job Costing Works - businessnewsdaily.com
  • Job costing is an accounting method that breaks down cost per project.
  • It helps businesses like construction and engineering firms track expenses and know how much to bid on contracts.
  • It’s not as helpful for businesses like restaurants and retailers that don’t bill by the job.
  • This article is for small business owners and professionals who want to understand what job costing is and how it works.

Job costing is a form of accounting that breaks down a company’s costs per individual job. Job costing is similar to cost accounting, except job costing allocates costs per job or project, rather than per business unit, activity or product line. 

Job costing allows companies – especially businesses that get paid by the project, like in engineering or construction – to track their costs for particular projects and to be better informed when bidding on future jobs. 

Why is job costing important?

Job costing is an important accounting function for businesses that do projects for clients and charge fees on a per-project basis. These companies need to know the direct costs of their projects, as well as how much of their firm’s overhead should be allocated to each project to cover their back-office expenses. 

This form of accounting is also important for companies that bill per project because it helps them track the costs of various projects over time. This gives them a better understanding of what drives their project costs so they can bid more accurately on future jobs.

However, because job costing breaks down costs by project, it’s only really important for companies that charge fees on a per-project basis – it’s not helpful for businesses like retailers or restaurants (unless they do a lot of catering) that don’t bill by the job.

Tip: Improve your ability to perform job costing with the best accounting software. You can learn about some great examples in our review of QuickBooks accounting software or our review of FreshBooks.

What is an example of job costing?

One example of job costing is a construction company that tracks its costs for a particular building project. First, the company would track direct costs related to that specific job – such as the cost of labor for workers on the job site, as well as supplies and materials used in the project. [Related: How to Calculate Cost of Goods Sold]

The company would also want to track elements like the number of hours various pieces of equipment are used, so it can allocate a portion of its annual depreciation expenses for certain pieces of equipment to the jobs they were used on.

In this way, the company would calculate its total cost for a specific project, both direct and indirect. The company could then review its job costs to determine its main cost drivers and identify any sources of cost savings.

Another example is an engineering company working with a real estate developer. If the company were bidding on a project to clear lots, lay sewer lines, and build a roadbed for a new residential development, it would need to know its internal cost to do the work so it can add an appropriate markup and submit a bid.

To do this, managers would look at previous projects and use those as a basis to estimate the number of hours and the equipment time required to move dirt, supplies to lay sewer lines (based on the number of linear fit to be laid and how many taps are to be added) for this particular project. The company would also want to consider factors like the planned specifications for the roadbed – the work required, the gravel to be purchased, and so on.

How to calculate job costing

To calculate job costing, add up the company’s costs of labor, materials and allocated overhead related to a specific job. Start by totalling the direct costs for a job, both labor and materials. Add in the portion of the company’s total overhead (including depreciation for specific equipment used on a project) allocated to that project, as well as a portion of salaries for back-office personnel, office supplies and marketing cost.

Here’s the formula for calculating job cost:

Materials cost + Labor cost + Allocated overhead = Total job cost

Key TakeawayKey takeaway: Job costing is usually easy with modern accounting software. The right program can easily track the costs associated with individual jobs. You can then use those records to forecast costs for similar jobs and bid on new projects. 

What companies use job costing?

Job costing is critical for companies that bill on a per-project basis, as well as those that bid on individual jobs. This accounting practice is the best way for them to track what it costs to undertake various types of jobs and to figure out how much to bid on future work.

Here are the common types of companies that use job costing:

  • Construction companies: These firms often bid on projects that require both labor and dedicated equipment time.
  • Engineering firms: These companies do a variety of projects of different types and sizes.
  • Healthcare companies: Projects can involve different types of staff and a wide range of resources.
  • Real estate developers: Developers need to know how much they have invested in a project so they can set sales prices for developed inventory.
  • Law firms: Firms do work for clients that may involve partners, associates, paralegals and other resources.
  • Consultants: Corporate consultants do work that may involve various types of human resources, special software and other tools.
  • Logistics companies: Freight companies usually bid on individual jobs, so knowing their cost for similar work is extremely important.

In addition to companies like these, job costing is a common tool for advertising agencies, software developers and web designers. It’s ideal for any business that needs to track the resources it allocates to specific jobs. While not all of these companies bill on a per-project basis, many can still benefit from tracking their costs in this way.

Alternatives to job costing

Though job costing is helpful for companies that bill for specific projects and regularly bid on jobs, it’s not always ideal. There are also other forms of accounting methods – even for allocating costs – that are better for companies that don’t work on a project basis.

Here are three common alternatives to cost accounting:

  1. Activity cost accounting: Activity cost accounting is similar to job costing, but it’s used to allocate costs to specific lines of business, like different divisions or products. But like job costing, this method involves accounting for direct costs, as well as allocating a portion of the company’s fixed cost to specific activities.
  2. Dual-entry accounting: Dual-entry accounting involves breaking down cash transactions into specific categories, such as income, expenses, dividends and liabilities. It can also track costs by using different accounts for specific clients, activities or projects.
  3. Specific classes: When you’re choosing accounting software, one important feature to look for is the ability to assign expenses to specific classes so they can be reviewed later using custom reports. In some cases, this can be an alternative to actual job costing.

When not to use job costing

Businesses that work on a project basis benefit from job costing as a standard accounting practice. However, companies that don’t do individual jobs probably won’t gain much insight from allocating their costs this way. 

Manufacturing companies, for instance, may be better off using standard cost accounting, as opposed to job costing, since their work is usually easier to allocate to specific product lines rather than individual clients or projects. The same can be said for some service or technology companies that don’t do work on a project basis – network administrators and SaaS companies, for example. 

TipTip: You may want to use an alternative method if you have a consumer-focused business, such as a retail store, financial services firm, restaurant, wholesaler, or distributor.

However, if you’re in engineering, construction, real estate development, or other industries that price work based on individual jobs, job costing is a must.