If you are working in the construction industry, you might be familiar with the term “Job costing”. But how do you describe it in words? What is job costing? Do you truly know enough about job costing to make a better budget and plan for similar projects in the future? Why do you have to know about job costing? In this article, we will bring you a clear picture of the term "Job costing" and make it easier for you to understand other related terms that you should distinguish in construction accounting. Let’s figure it out together!
What is Job Costing?
Job Costing is a technique from management accounting. This method of costing is used to determine the costs of specific jobs or work. It is also applied where work consists of separate work or contract jobs. This practice is also known as ‘Job Lot Costing’ or ‘Lot Costing.’
There are two types of costs:
Direct: Costs directly linked to individual jobs when it is directly traceable
Indirect: These are the overhead costs not directly linked to a project.
Overheads are the business running costs. They have no direct link to generating income and are often put under Gross Profit on the Income Statement. Most commonly, these are placed underselling and general and administrative expenses.
What are the Special Features of Job Costing?
The special features of job costing striking our attention include:
Under Job Costing, production is carried on by a manufacturer against their customer’s order and not for stock.
Each job or work-order is of a specific nature.
Under Job Costing, the cost of each job is ascertained separately. Therefore, it’s easy to track costs on a per-project basis to analyze pricing and profitability better, or in other saying, determine profit or loss on each job.
It helps to detect which jobs are more profitable.
It provides the base for deciding the cost of similar jobs to be undertaken in future as a part of future planning.
Job Costing helps in managing and controlling costs better because the estimated and actual costs are in comparison.
Why is Accurate Job Costing Important?
Profitability is usually what business owners target. Accurate job costing can improve profitability because it helps to prepare accurate estimates, determine what to charge for a product, a job, or service.
Accurate job costing provides clear financial data on revenue and costs on any given project which helps with management decisions for future planning.
Job Costing vs Process Costing
Job Costing tracks major costs to assign direct labor and direct material to individual jobs.
Process Costing tracks major costs to assign direct labor and direct material to each process. Process Costing is used in the industry where identical products are made in a huge mass. It is most suitable for large-scale production and where there are multiple levels of manufacturing a product. Some examples include paints, paper, soap, steel, cold drink.
Top 10 differences between job costing and process costing
The following are the major differences between job costing and process costing:
The costing method which is used for the ascertainment of the cost of each job is Job Costing whereas the costing technique used to determine the cost of each process is Process Costing.
We use Job Costing where the products are produced of a specialized nature, whilst Process Costing is applied where standardized products are produced.
Under Job Costing, the cost is calculated for each job, but under Process Costing the cost of each process is calculated which is then divided evenly to the number of units manufactured.
Under job costing the cost center is the job itself while the process is the cost center in case of process costing.
Under job costing, each job requires special treatment. Special treatment is not required for each process in process costing.
You don’t transfer cost in job costing, from one job to another. In the process costing, you can transfer the cost of the last process to the next process.
The possibility of cost reduction is very less in Job Costing. In contrast to Process Costing, the scope of cost reduction is quite high.
In Job Costing, the cost is ascertained after the completion of the job, but in Process Costing, the cost of each job is determined.
In job costing, losses are not bifurcated. On the contrary, in process costing normal losses are ascertained carefully, while the abnormal losses are bifurcated.
In job costing, WIP may or may not be present at the end of the financial year. In process costing, WIP will always be present at different accounting period.
What Type of Business can use Job Costing?
Any business that provides products or services to clients benefits from job costing. This method help business owners understand better their own costs in terms of products, materials, parts.
Job Costing method is considered most suitable to such activities as painting and decorating, roofing and tiling, automobile garages, electrical fittings, plumbing works, repair shops, etc. where work is done according to the customer’s specification. The method is often associated with construction companies since they work with third-party contractors and each of their jobs is different. However, almost any business can use job costing because it develops accurate estimates of material, labor and overheads costs which help businesses to position themselves to deliver jobs on budget and on time.
A majority of the following industries use Job Costing:
Health care and life sciences organizations
Transportation and logistics providers
Marketing and advertising agencies
What are the Advantages of Job Costing?
Obtain the cost of production of every product or job
Ascertain the profit or loss of the production or execution of the product/order/job
Determine the profitability for each job individually
Helps with preparing correct estimates of the cost of jobs being undertaken
Helps with judging the operational efficiency of the business activities
Provides a detailed cost analysis of labor, materials, and overheads for each job
Compare estimates and actual costs
Detect jobs that don’t make a profit
Provide a precise quote
Documents used in Job Costing
Manufacturing or production order: This one allows production departments to produce a specified quantity of a product.
Job cost sheet: often used to record costs incurred in the production stages.
Other documents: includes material requisition slips, tools and spares order, time tracker, inspection order, etc. are used as a control mechanism to carry out the dispatching functions.
How to Calculate Job Costing
Unlike financial statements which showing us performance after a job is complete, job costing gets in more details of specific costs associated with certain work or projected. The basic job cost formula is adding together the cost of direct materials, direct labor, and applied overhead. We are going to show you how these costs are calculated in each of their own areas.
Labor costs: this is your paying to all workers involved on a particular job, third parties and sub-contractors included.
Labor cost = Number of working days x daily pay rate x number of workers
Material costs: Add direct & indirect material costs together then you have material costs. Direct costs include raw materials whereas indirect costs might be tools, machinery used to produce goods, or office supplies.
Overhead: This is the most challenging to calculate accurate estimates as it requires us to break down the business’ daily operating costs and attribute the right proportion to the job or project. We need to include the total overhead needed to complete the job including office rent, electricity, other business expenses, etc. Due to its complexity, businesses often use a blanket overhead fee for each job such as 10% per job.
How do businesses track and prepare job cost sheets?
Due to the complexities associated with managing costs for each job, most businesses use accounting software to put the job sheet preparation in automation. Some accounting software with job costing features commonly used are SecturaFAB, QuickBooks (Desktop & Online versions), Procore, BuilderTREND, ClockShark, BQE Core Suite, Premier, etc. Integrated software solutions make the job costing process much simpler due to its accuracy and better tracking systems.
In our previous article, we mentioned: "How To Do Job Costing In Quickbooks Online?". If you are using Quickbooks for your construction business, you should definitely not ignore them.
What can job costing benefit from accounting software?
Listed below are the benefits that the job accounting software can bring to you:
Better Cost Control: Data provided for historical and estimated costs and actual costs allow for better planning of how much the completed product will cost. It reduces the amount of money lost on a given job because everything is accounted for, both billing and labor management included.
Better Business Management: The visibility of all data and information for a job or project gives you a better grasp of the work progressing on a daily basis as well as specific areas that need to be improved.
Reduce future conflict: As accurate costs are reported, businesses can provide their customers better pricing estimates. You could also keep your client updated on the expense details and project progress on a regular basis throughout the course of work. This will help to avoid any future conflicts you may have with your customer.
Real-time reporting: Real-time cost information is very important for businesses working on high-stakes jobs. Any decision and adjustments made during the course of the project will have a strong impact on the business profitability and customer satisfaction. Given the consistent and accurate data provided of labor, material, and overhead costs, business owners could make timely decisions improving productivity, efficiency, and profits.
The fundamental target of any business is to make a profit. Job costing provides an insight into the relationship between revenue and costs. It also shows us areas where improvements should be made for better management, tracking, and planning. One more important thing is job costing helps us to provide accurate cost estimates for our customers.
Are you ready to get help, or are you still not sure if you need help to run your construction business? Contact Construction Cost Accounting to have a free 15-minute consultation!
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