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Job costing is the process of determining the labor and materials cost for each job in a systematic way, and then using this information to create a quote for the customer. Job costing or cost accounting can be used in virtually any industry to ensure that the product pricing covers actual costs, overhead and provides a profit. The purpose of any business is to make money, and job costing is the most effective way to ensure that occurs.
There are three elements to job costing: determine customer requirements, identifying job related costs and overhead. The most important item in this process is accurate tracking of time and costs associated with any job. There are a several accounting software packages available to help business owners accurately track all business expenses. In order to provide an accurate quotation, it is very important to specify the exact requirements in writing and to obtain agreement from the client. Once the details have been finalized, you can then begin to determine the actual costs of the materials.
First, estimate the labor required to complete the job. Avoid using one flat rate, and instead calculate the time required at the actual rates, based on the skills required for different aspects of the job. Add all the labor and material costs together and calculate a contingency amount, ranging from five to ten percent. This amount covers minor changes, and additional time requirements.
Calculate a standard overhead charge. The amount of overhead charged varies widely, but a good rule of thumb is to take the total non-job related costs and divide it by the number of working days in the year. Multiply this value by the number of working days for the job and add this amount to the job.
Profit margin is central to any successful business. These rates vary by industry and the local economy. If your firm has a monopoly on a particular service, then the profit margin can be higher. In a local economy with competing companies, the margins are lower, as you must compete with other firms for customers.
Finally, keep track of your expenses throughout the project. Reconcile the job costs against the actual cost at the middle and end of the project. Determine if there were additional costs or if the project required less resources than anticipated. This type of review provides valuable information that can be immediately applied to the next quotation. Making adjustments to the costing model is necessary to ensure that the pricing is competitive and accurate.
@Charred - I believe that any project where you have to make stuff in a material sense is a candidate for job order costing, in my opinion. We recently completed a building program for our church.
There were materials, labor rates and other things we had to factor in for the project. All of this went into the budget. In end we went a little over budget, however, because a storm in one part of the country affected the supply of materials; instantly the prices went up.
In situations like this I believe that a job costing software package would enable you to identify where your costs might be unexpectedly high and therefore affect your final numbers.
@nony - Actually, while in general I agree I do think that a job order costing system would be used in some service industries as well.
For instance, consider a mechanic. He is not making any products; however he does have an hourly labor charge and a certain rate that he charges for different kinds of services that he performs.
There are parts involved, with associated costs too, so I think that would use a job costing system.
I think that it should be pointed out that job costing is typically used in manufacturing businesses.
My dad was a cost accountant and he said that when the manufacturing base more or less left the United States, the demand for this kind of accounting diminished.
In manufacturing job costing you typically deal with things that are easy to quantify, like parts on an assembly line and quotas and individual labor rates.
If you are in another business, like software (which I work in), it’s hard to quantify the stuff you do using cost accounting. There are other methods of quantifying what we do, to be sure, but cost accounting isn’t one of those methods.
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