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Job Costing
Job costing is an accounting method designed to help you track the cost of individual projects and jobs. It involves looking at direct and indirect costs, and it’s usually broken into three specific categories: labor, materials and overhead. Understanding costs for a job at this level will help you better budget and plan for similar projects in the future, and you may discover some ways to cut costs or find items that should be billed to the customer.
Who benefits from Job Costing the most?
- Construction Companies
- Electricians
- HVAC
- Mechanical
- Painters
- Plumbers
What is Job Costing?
Job costing is a precise method of tracking all the costs and revenue associated with a particular project. Projects might include one-off customer undertakings, manufacturing new products 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 of these elements can be broken down further. For instance, labor costs might include both employee wages and third-party vendor fees. Material costs can include both direct raw materials that appear in a finished product and the indirect materials used to create the product, like equipment. Companies must carefully account for and plan around each of these elements to deliver their projects successfully and on time.
Job Costing Explained
Job costing has a few primary goals:
- Understand profit or loss of each job. Job costing looks at each element involved in a specific project so you can track profitability of each one.
- Compare to estimates. By analyzing how successfully you manage estimates, you can better price jobs in the future. The purpose of job costing is to ascertain the profit or loss made on each job.
- Uncover inefficiencies and excess costs. Things like repetitive work that could be automated 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-estate developer. The construction company will estimate every cost and then track every charge involved in delivering the project, including material and equipment costs, team and subcontractor 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 similar projects 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, project or 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 most important accounting practices for small businesses to reach gross profit margin goals. Accurate job costing can improve profitability, help you better manage employee scheduling and be a key component of prompt financial reporting. Proper job costing leads to better profitability, project estimating, management decisions and timely financial reporting.
Accurate job costing helps businesses strike a balance between revenue and costs on any given project by carefully analyzing 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 life cycle, 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 tax filing. For example, itemized costs help accounting teams accurately analyze how project expenses can fit into the company’s overall financial picture.
