What is job costing?
At the highest level, job costing is the calculation of all costs that go into a particular “job”. “Job” can be referred to as a task, project, customer, or many other classifications. Job costing is most commonly used to calculate the profitability of work completed.
The Three Types of Cost
Every “job” has three types of costs associated:
Labor – What a company pays their employees, typically as hourly, salary, or commission/bonus. A common mistake when tracking labor costs is not including fringe benefits such as taxes, insurance, worker’s comp etc. According to the SBA, on average an employee costs their company an additional 25 to 40% of their pay in additional expenses.
Materials – Any type of consumable that cannot be reused for future jobs (screws, concrete, fuel, lumber) as well as the depreciation or amortization of reusable tools (vehicles, hammers, computers). Material costs will vary greatly depending on industry.
Overhead – Also known as fixed costs, these are the costs that go into keeping the business running as a whole. A common practice is to have both estimated overhead costs as well as applied overhead costs. Estimated is what a company expects to pay over a time period (future looking), where applied overhead is the actual cost once that work or time period is complete.
Typically these costs are spread over all jobs during a given period and are calculated by expected labor hours.
For example, a company expects to have $1,000,000 in overhead costs during a calendar year, and expects that their employees will put in 200,000 hours during the same time period. To calculate overhead cost per hour worked (also known as predetermined overhead rate) you would divide $1,000,000 by 200,000 hours and see that every hour worked costs the company an additional $5 in overhead.
Three reasons why job costing matters
It’s a direct look into profitability.
This is especially valuable in industries where a company is billing another company for work completed, such as construction & trade or professional services. If a company bills their client $50,000 but it costs the company $80,000 to deliver on the agreed upon product or service they are losing money by performing the work. A common mistake is to not include all of the costs that go into a job. In the above example, if a company only pays their employees $40,000 in hourly pay during that time they may think they made $10,000 in profit, but they didn’t include fringe benefits, materials and overhead costs (in this example all totaling an additional $40,000) making them unprofitable.
Better estimated future costs.
This is especially valuable in industries where a company bids on work. By having accurate job costing estimates a company knows what it’s bottom line revenue needs to be to break even. They can then calculate how much profit they require to accept the job and make an appropriate bid. A company that doesn’t have accurate job costing estimates is simply taking a guess and hoping they are either profitable (if they bid low) or they won’t get underbid (if they bid high).
Comparison of jobs
A company can use job costing to compare two different jobs against each other to determine which was more profitable. This can be as simple as realizing that one type of job is more profitable than another (mowing a lawn vs. landscaping), or it can be more granular and determine what aspects of each job was more profitable than other parts (mowing a lawn with a hand mower vs. a riding mower).
Ultimately this leads to better decisions in the future into what types of jobs to take or best practices to increase profitability for a job.