How to Calculate Job Costing? A Complete Guide for Small Businesses

How to calculate Job costing

Job costing is an important tool of accounting that helps businesses in keeping the record of individual jobs. Accumulating the costs of labor, materials, and overhead for a particular project helps you to calculate the job costing. It also impacts the sales prices. For an effective job costing system, you must differentiate between direct costs, indirect costs, overhead costs, and additional costs.

In this article, we will discuss:

What Is Job Costing?

Job costing is a project-based accounting that helps business owners to track the costs and revenues for every individual project. It focuses on all the three parameters of cost, which includes:

  • Cost of labor
  • Cost of materials
  • Overhead costs

It is based on actual information and makes very few assumptions as compared to other costing methods.

The construction industry utilizes the job costing method because there are various jobs for which costs vary. Many other small businesses, manufacturers, law firms, and creative agencies use the costing method to track the individual jobs for evaluating their expenses. It helps the businesses to manage the expenses effectively in the future.

How To Calculate Job Costing?

Labor costs, material costs, and overhead costs help businesses in calculating the job costing. The accounting activities to calculate the job costing are:

Direct Labor Costs Calculation:

You need to calculate the costs you pay to your employees who are getting paid per day for a project. For that, you have to multiply the pay rate by the time you estimate for the completion of a project. If you are hiring some more contractors for your project, you should also add their costs to the total labor costs. It will give you an individual estimate of the costs of all the contractors.

Material Costs Calculation:

You should calculate the costs of material you are utilizing for a project. In the case of a construction business, the material includes:

  • Wiring
  • Screws
  • Steel
  • Pipes
  • Nails

Costs of these, along with many other construction materials, you need to calculate if you utilize them.

Overhead Cost Estimation:

It is very difficult to calculate the overhead costs for a business. The reason behind this is that you don’t have exact figures to calculate these costs; rather, you depend on estimations.

These costs may include:

  • Office rent
  • Depreciation on equipment
  • Administrative costs

You can ask your accountant to sort these costs and manage them by using a specific approach towards overhead expenses. Many businesses assign up to 10% of the overhead costs for each job.

Equation For Calculating total Job Cost:

You can calculate the total job cost by using the following equation:

Total Job Cost = Direct Materials + Direct Labor + Applied Overhead

What Is a Predetermined Overhead Rate?

It is a calculation that helps in calculating the estimated overhead costs for each job in a particular time period.

Businesses use the estimation method to estimate their overhead costs and activity for a particular year. This estimation helps them to create their annual budgets to calculate the overhead rate for each job.

Equation For Calculating Predetermined Overhead Rate:

 Predetermined Overhead Rate = Estimated Overhead / Estimated Activity

You can not include all the estimated business activities in your budget. The activities that have some link with the overhead costs are applicable for determining the overhead rate. It may include the estimated direct labor hours.

Predetermined Overhead Rate Example:

Job costing for your construction business:

  • You estimate that in 2021 you will have $200,000 in overhead costs.
  • You also estimate that your employees will work for 5000 hours in 2021.
  • Your calculations will be:

Estimated Overhead / Estimated Activity  =  Predetermined Overhead Rate

200,000 overhead / 5000 direct labor hours = $4 per direct labor hour

After calculating the applied overhead rate, you can use it for calculating the total job cost, such as:

Total Job Cost = Direct Materials + Direct Labor + Applied Overhead

Example Of Job Costing:

If your agency completes the painting job for your client and your billing costs are:

Payable labour hours = $10,000

The bills you pay for material cost = $1500

Predetermined overhead cost = $5000

Now you can easily calculate the total job costing as:

Direct Materials ($1500) + Direct Labor ($10,000) + Applied overhead ($5000) = $16,500

Your total job cost for your painting job is $16,500.

Who Uses Job Costing?

Many businesses use the job costing method for the products or services they offer to their clients. It is common in the construction industry, but other companies also use this method, these include:

  • Retail companies
  • Medical services
  • Doctor’s offices
  • Engineering firms
  • Law firms
  • Accounting companies
  • Private investment companies
  • Advertising firms
  • Distribution companies
  • Food processing businesses
  • Film studios

Related Articles:

What are the operating expenses

How to calculate net sales