How to Calculate Job Costing

Pitching for new work is always exciting, but figuring out what to charge a potential client can be difficult. You want to offer a competitive rate to secure the work, but you also need to be sure you cover your costs and make money too. Job costing can be the key, helping you to estimate expenses so you can offer a fair rate accurately. 

What Is Job Costing? 

Job costing is a system designed to help you track the cost of individual projects and jobs. It calculates the expenses you’ll accrue when providing a service or creating a product, focusing on the three key areas: materials, labour and overheads. It can be utilised by any business but is mainly used for custom orders or services, not long-term projects. 

Not only will accurate job costing ensure you don’t charge too little or price yourself out of work by charging too much, it can also help to improve profitability, better manage employee scheduling and can be a crucial component of prompt financial reporting, all while helping you reach your gross profit margin goals.

## How to Calculate Job Costing 

Calculating the cost of a job is a four-step process.

1. Calculate direct material  This involves looking at all the materials you will use directly when delivering your products or services. It shouldn’t include any indirect costs as these will be part of your overheads.

2. direct labour  Next up are your direct labour costs. This includes all workers who are immediately and directly involved in ensuring the product or service is delivered correctly.

3. Determine overhead rate 

Slightly trickier is working out your overhead rate. As these are indirect expenses, it can be harder to allocate these accurately to specific projects. Overheads to consider include rent, the cost of equipment, utilities and manager salaries, which won’t be covered by the direct labour costings.

To make this easier, many businesses calculate an overhead rate. To do this, you need to add your total overhead costs and divide the number by an activity driver. An activity driver is any event or activity that substantially affects the overall cost of a product. It could include labour hours, employee pay, or machine hours. The key is to make sure your activity driver works for all your projects.

So, for example, if you pay £5,000 in overheads each month, and your employees work for 650 hours a month, you would divide the £5,000 by 650 to get £7.69 per labour hour (the overhead rate).

When you then calculate how many hours of labour you’ll need to complete a project, add this cost to each hour to get an estimate of your overhead costs.

4. Add Everything Together Finally, it’s simply a case of adding your direct material, direct labour and overhead costs together, and you’ve got an estimate for the job.

Why Is Accurate Job Costing Important? 

Not only does job costing ensure you charge the correct fee for your work, it also gives you information that could be used to reduce costs in the future. By assigning specific costs to individual jobs, you can track and analyse them throughout the project to identify ways they could be reduced for similar jobs in the future. You may also be able to identify costs that can be charged back to the customer – if, for example, unexpected costs were accrued during the project.

Crucially, though, as job costing looks at each element involved in a specific project, you can track the profitability of each job. If you find your estimates are inaccurate when you’re starting out, you can use that information to price jobs better going forward.

By looking closely at individual costs, you can also identify areas of inefficiency or find tasks that would be better automated or adapted so you can reduce costs and boost productivity in the future.

What is Process Costing?

It’s important to note that, while related, job costing and process costing are not the same. While job costing is a means of quantifying the individual costs involved in delivering a project, process costing breaks down costs over a given time frame. This can be particularly useful when the cost of individual units or job outputs can’t easily be differentiated.

With process costing, companies assign costs to a collection of products or project outputs generated, usually within a month, and use that to calculate a unit cost. It is most often used by companies mass-producing multiple similar products at once.