Job Costing Explained: How To Do Small Business Job Costing

Job costing tracks the expense of providing a particular product or service, so your business can set the right price to ensure project profitability. Without accurate job costing, you risk charging less for a job than it costs. US Bureau of Labor Statistics figures show that 50% of businesses fail within five years of opening. Persistent underpricing, which causes cash flow shortfalls, contributes to the leading cause. In this article, you’ll learn how job costing works based on several examples, and how job costing can help your business.

What is job costing?

Job costing is a method of accounting for all the expenses of a specific project or service, such as manufacturing new or limited-run products, building a house, catering an event, or designing a website. It accounts for direct materials, direct labor, and indirect costs, also known as overhead costs, to show the cost and profit of a job. Companies use the job costing process to gauge and compare job profitability, which helps them choose projects and make pricing decisions. It also helps businesses spot areas for potential cost savings without sacrificing quality.

Job costing is widely used by businesses that fulfill one-time custom orders, or products or services that are unique to particular customers. Construction firms, marketing agencies, and software developers are among such business types. For example, a homebuilder can use job costing to determine the cost of building a custom home and then set a price that includes a profit margin.

Job costing vs. process costing

Job costing and process costing are both used to track costs, but they’re meant for different types of production. Job costing focuses on individual projects and limited output, while process costing focuses on mass production.

Businesses that produce large quantities of identical or similar products, such as beverage bottlers, auto-parts manufacturers, and packaged-food processors, typically use process costing. It tracks the costs of each stage of the production process, averaging them to determine per-unit cost, which is essential for setting a per-unit price. For example, a soft-drink six-pack costs $2 to produce, and the manufacturer sets a selling price of $2.50. 

How to implement job costing

1. Outline the job
2. Calculate direct materials and labor costs
3. Allocate overhead
4. Create a budget
5. Track costs during the job
6. Analyze costs

To implement job costing for your business, you need to outline the job, calculate direct costs, and allocate overhead, among other steps. 

1. Outline the job

Before any work starts, determine the job scope, objectives, and the expected completion date. Outline everything you’ll need to complete the job to identify all related costs. For example, a homebuilder might consider two different job opportunities: one deluxe home that will take six months to complete, or three middle-market homes requiring four months. 

2. Calculate direct materials and labor costs

Direct costs for materials are those used specifically for the product or service. Cement, lumber, roofing tile, and windows are among the various direct materials costs in homebuilding, for example. Receipts, invoices, and purchase orders will later provide accurate records of these direct costs and serve as a basis for comparing your estimate to actual costs.

Labor costs include wages paid to workers and staff involved in the specific project. To calculate labor costs, multiply an hourly or daily wage rate by the number of workers and the expected duration of the job. Work performed by subcontractors is also included in the estimate.

3. Allocate overhead

Overhead costs commonly include rent, utilities, office supplies, machine operating costs, depreciation, insurance, advertising, and administrative expenses. 

To figure out how much of your business’s overhead expenses to assign to a job, choose an overhead allocation method. One overhead allocation method is to look at direct labor hours and overhead from the past year. For example, a builder has overhead expenses of $200,000 and 5,000 direct labor hours in the past year. The hourly overhead rate then is $200,00 divided by 5,000, or $40. 

A job requiring 100 hours would be allocated $4,000 in overhead costs based on the $40 hourly rate. Consider consulting an accountant about how to allocate overhead, or use business software that can track job costing, such as NetSuite, Miter, or Foundation.

4. Create a budget

Develop a job budget by estimating the costs associated with the project. Start by determining required work hours (including any costs of subcontractors) and raw materials. 

A budget estimate gives you an idea of the job’s cost and its profitability. For example, the homebuilder assumes costs of $1.5 million for the deluxe home, which they expect to sell for $1.8 million, or a 17% profit margin. The three-home project costs $1.1 million per home against a $1.5 million sales price, generating $400,000 profit per home, or a 27% margin. Here, job costing would let the builder see that the three-home project generates $900,000 more total profit than the single home, at a higher margin.

Once you have all the above expenses, add up all the costs involved to determine total job costs:Direct materials + Direct labor + Indirect costs (overhead) = Job cost

5. Track costs during the job

Comparing costs in real time to your budget is crucial to understanding how a job is progressing. This can help you spot any cost overruns, make spending adjustments on the fly, or alert your client and avoid sticker shock. 

6. Analyze costs

When the job is finished, determine if it was profitable enough. Compare actual costs with your initial estimates; deviations may help you spot inefficiencies or unexpected expenses. Analysis can help you make more accurate job costing estimates for future projects.

Job costing in ecommerce

Ecommerce job costing is important because so many businesses in the sector produce or sell products in small batches. Packaging and shipping often are significant sources of direct labor and materials costs.

On your ecommerce platform, custom data fields called metafields let a business tally detailed cost data on materials, labor, job milestones, budget targets, and profitability for specific projects. Metafields can store granular cost data that standard data fields omit, such as detailed material expenses, shipping fees, or subcontractor costs. Businesses can use metafields to input a projected cost for a specific task and then update it with the actual cost for comparison.

Third-party apps available on Shopify, including QuickBooks Online, can also help with project costing.