What Is Job Costing? And Does Your Business Need It?
As a small business owner, you know the importance of keeping up with the financials of your business. Like many other new business owners, you may even be handling all of the accounting yourself until your business is ready to hire a bookkeeper or accountant. If you’re new to accounting, it’s not uncommon to overlook some data and reports because — let’s be honest — it can all just be a bit overwhelming. However, if you work on multiple projects for different clients, there may be one specific accounting concept that you need to understand — job costing.
Maybe you’ve heard the term before or it’s brand new to you as you learn more about accounting. No matter what the situation, though, if your business handles projects or offers services, job costing is a must. In this post, we’ll break down what job costing is, how it can benefit your business, and how to decide if job costing is right for you. We’ll also provide you with job costing software options to help you get started. Ready to dive in? Let’s go!
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What Is Job Costing?
Let’s keep the concept of job costing as simple as possible without getting too technical. Job costing (also known as job order costing) is a method in accounting that is used to track the costs and profitability of each job you perform for your customers. Job costing breaks down all associated costs — labor, materials, and overhead — involved in providing a service or product for a customer. This method is used when a business provides products and/or services that are unique to each customer.
Job costing allows you to more accurately track the profit or loss for each job your business takes on, and it can even be beneficial to your customers (more on that later). With job costing, you can easily determine if your income exceeds the cost of goods sold (profit) or if the cost of goods sold exceeds income (loss). Feeling lost? Take a deep breath and get an accounting refresher with our Quick Guide To Accounting Terms And Concepts.
Job Costing VS Process Costing
Another accounting method you should become familiar with is process costing. Process costing is used to determine costs when units produced are identical (unlike job costing, which determines costs for projects that are unique to each customer). For example, if your business mass produces coffee mugs that are identical or nearly identical, the process costing method would allow you to assign a cost to each mug without tracking each unit individually.
With process costing, total costs — materials, labor, and overhead — are used to determine the price of each item that is produced. If you produced 100,000 mugs at a cost of $150,000, the per unit price would be $1.50.
Now, let’s say that your company produces many custom items on a smaller scale — mugs, t-shirts, tote bags, and other items. If this were the case, job costing would be a more effective method.
The Benefits Of Job Costing
There are several benefits associated with job costing — the biggest being the ability to see if the jobs and services you take on are profitable. With job costing, you can easily calculate the profit of each job or service — hopefully, it’s not a loss, but if it is, that’s the exact problem job costing sets out to fix. By identifying your profit you can determine if the reward is worth the time and labor, if you should increase your prices, and more.
Tracking costs associated with each job allows you to spot patterns that could be impacting your company’s bottom line. With job costing, you can determine if there are ways that you can cut costs and boost profits. You may also be able to determine if there are additional charges that you should be passing along to your customers.
Job costing also helps you provide more accurate estimates to your customers. If you’re in an industry like construction, providing accurate estimates is difficult because no two jobs are the same. However, job costing allows you to more accurately budget for jobs, in turn allowing you to provide better estimates to your customers.
What Types Of Businesses Need Job Costing?
Any business that offers multiple products and/or services can benefit from job costing. Many businesses within the service industry will find that job costing allows them to better serve individual clients and customers. Some specific businesses that should use job costing include:
- Construction businesses
- Law firms
- Accounting firms
- Medical services
- Investment companies
- Manufacturing businesses
- Vehicle customization
If your industry isn’t listed here but you provide unique or custom products and/or services to your customers or clients, your business could benefit from job costing (we’re talking to you, custom mug Etsy shop owner).
How To Do Job Costing
Now that we’ve covered the basics, let’s break down how job costing works. There are three different costs that you need when using this accounting method: direct materials, direct labor, and overhead.
- Direct Materials: Direct materials include anything that is used to create your final product. For example, if you build wooden furniture, materials would include wood, screws, nails, stain, and other expenses.
- Direct Labor: Direct labor includes all costs paid to workers that are creating your product or providing a service. The wages of employees, contractors, and subcontractors would be included in these costs.
- Overhead: Overhead costs, which are indirect costs, are a little more difficult to calculate. You can’t trace these costs directly to the product, but these elements are critical to completing the job and the operations of the business. Machinery that is used to create a product, rent, utilities, and other expenses are considered overhead costs. Only a portion of these costs is allotted to a job. For example, let’s say that a piece of equipment is used to create a product. Since the equipment will be used for multiple jobs, the full price of the equipment isn’t allotted to just one job. Instead, a smaller percentage is calculated per job. Typically, this is calculated by using historical data. This allows you to have standard costs that can be used for each job that is completed. However, your business may have other methods for calculating overhead per job.
In job costing, the total direct materials, direct labor, and overhead costs are added together to determine the total cost to complete the job. This number can also be further broken down to determine the cost per unit. For example, if the total cost to produce 100 custom units is $1,000, the total cost ($1,000) is divided by the number of units (100) to show that each unit costs $10 to produce.
You can use these figures to calculate your profit and loss for a set period of time. To do this, simply subtract your expenses from your income from the same time period. A positive number indicates a profit, while a negative number indicates a loss.
Sound confusing? While you can do your job costing calculations by hand, there are plenty of software options that will do the hard work for you. Stay tuned for the best job costing software options.
Job Costing Example
Let’s take a look at the coffee mug example from earlier. Customer A orders a custom ceramic coffee mug from your business. The total cost (materials, labor, and overhead) are $15. You charge $20 for the mug, resulting in a profit of $5.
Let’s say, though, that you weren’t tracking your costs. If you charged your customer $12 for the mug, you would actually sustain a loss of $3. You would need to cut costs or increase your pricing in order to become profitable.
Now, let’s say that Customer B also orders a ceramic coffee mug, but this mug is larger and costs $17 to make. You invoice the customer for $25, earning you an $8 profit.
Customer C orders a stainless steel coffee mug. These cost $25 to customize. You charge Customer C $40, which results in a $15 profit.
As you can see, the numbers differ from job to job. Keeping track of these numbers through job costing allows you to see where you could cut costs or where you need to increase your pricing in order to boost your profits.
Popular Job Costing Software
Job costing is all about making sure your time is profitable, right? So it only makes sense to simplify how long it takes you to calculate everything by hand and let accounting software automate the job costing process for you.
Many accounting programs have job costing built-in. These programs allow you to create projects or services, add budgets for your jobs, and attach time, expenses, costs to those projects. Then you can easily run reports comparing your project’s budget versus the actual costs. You can also send estimates, invoices, and forecast cash flow. By using accounting software to handle your job-costing, you can quickly get a handle on your business’s finances and ensure that your time is spent well so you can get back to running your business.
While many accounting programs offer job costing, not all programs have the same features available. The most common job costing accounting programs include Xero, QuickBooks Online, and QuickBooks. Start your search for the best job costing software for your business with these options.
Xero Job Costing
Xero is cloud-based accounting software that has established its place among the big players since its launch in 2006. With Xero, you’ll have access to project management features, reporting, and over 700 integrations, although features vary based on the plan that you select.
Xero’s Established Plan comes with basic job costing features. This includes budget monitoring, project invoices, create projects, and attach expenses and time.
QuickBooks Online Job Costing
QuickBooks Online has over 2 million users and continues to grow by adding advanced new features. Some of QuickBooks Online’s standout features include inventory capabilities, customizable invoices, and its lending platform, QuickBooks Capital.
QuickBooks Online has also added a project management feature that allows you to create new projects, add billable and unbillable time and expenses, access reports, and track job profitability.
QuickBooks Desktop Job Costing
Since 1992, millions of small business owners and accountants have used QuickBooks. Though it has a steep learning curve, this software will open up a variety of features useful to your business, such as inventory tracking, tax capabilities, budgeting, and contact management.
QuickBooks Desktop Premier
QuickBooks also has several project management features. While it has job costing, features are a bit limited, so if you’re looking for something more robust, you might want to check out other software.
Accounting software isn’t the only option that provides job costing. Some project management software programs, like Workflow Max and SmartSheet, also include job costing features. Check out our project management software reviews to explore more options.
While job costing can be intimidating, it can be extremely beneficial for your business. With job costing, you can know the exact profit (or loss) associated with each unique job or service your company performs. You can use this information to analyze your current processes, pricing structure, and overall financials. If you don’t currently have accounting software with job costing capabilities, check out our top accounting solutions to find the right job costing solution for your business.