What Is Job Costing and How to Calculate Job Cost for Small Business

Job costing is a powerful tool that can help you track and manage your costs more efficiently. In this article, we’ll help explain how to do job costing, explore its upsides and challenges, and introduce you to job cost tracking software in QuickBooks Online.

What is Job Costing?

Job costing is a method businesses use to calculate the total costs involved in completing a specific project or job. This approach allows you to track all the expenses related to a job, including materials, labor, and overhead, to determine its total cost and, ultimately, its profitability.

How to Calculate Job Cost

The total job cost is the sum of three primary components: materials, labor, and overhead. Here’s a closer look at each:

1. Materials

Materials refer to the direct costs of all the raw materials and supplies used specifically for a job. These are the tangible items consumed or utilized to complete a project, ranging from lumber for a construction project to fabric for a clothing manufacturer. Tracking these costs requires keeping detailed records of all material purchases attributed to each job, including quantities and prices. Including the small items is vital, as they collectively impact the total material cost.

2. Labor

Labor costs encompass the wages or salaries paid to employees, contractors, and freelancers who work directly on the job or project. This includes the hours worked and any additional expenses related to labor, such as payroll taxes, benefits, and overtime pay. To accurately calculate labor costs, businesses must track each employee’s time on specific jobs using timesheets or job costing software. Each hour worked is multiplied by the employee’s hourly rate (including any extra costs) to determine the total labor cost for the job.

3. Overhead

Overhead, also known as indirect costs, are expenses that contribute to completing a job but are not directly associated with a specific project. These costs include rent for the business premises, utilities, equipment, industry-specific technology, software, etc. Since overhead is not directly tied to one job, they are allocated based on a predetermined formula. It might involve spreading the costs proportionally across jobs based on labor hours, labor costs, or another equitable basis. This ensures each job carries a fair share of the business’s overall operating costs.

Job Cost Calculation

To calculate the total job cost, add up the estimated costs from each of the three categories:

  • Total Materials Cost: Sum of all materials purchased and used for the job.
  • Total Labor Cost: Sum of all labor hours worked on the job multiplied by their respective rates, including additional labor-related expenses.
  • Allocated Overhead: The portion of overhead costs allocated to the job based on the chosen method.

The simplified formula is:

Total Job Cost = Total Materials Cost + Total Labor Cost + Allocated Overhead

By understanding these costs, businesses can price their services or products more accurately, ensuring profitability while remaining competitive. It also highlights areas where cost savings might be possible, either by negotiating better material prices, optimizing labor efficiency, or reducing overhead expenses.

Upsides of Tracking Job Costs

  • Know Your Costs: When you know exactly how much it costs to do a job, you can always set your prices to make a profit. This means you won’t accidentally charge too little.
  • Stay Competitive: With this knowledge, you can tweak your prices to stay competitive while making a reasonable profit.
  • Guess Less, Know More: By looking at what you spent on past jobs, you can guess your future costs more accurately. This helps you plan how much money you’ll need.

Challenges of Tracking Job Costs

  • Busy Work: Gathering all the numbers and keeping track of everything can take time and pull you away from other important work.
  • Learning New Things: Starting to track job costs might mean learning new software or methods, which takes time and effort.
  • Spreading Costs: Figuring out how to fairly spread out the general costs of running your business (like rent or the electricity bill) across different jobs involves some guessing, which might only sometimes be spot-on.
  • Expect the Unexpected: Your guesses about how much a job will cost can be thrown off by surprises, like a sudden increase in material prices or an unexpected need for more hands on deck. This can make your original plans and pricing off-target.

TL;DR Upsides and Challenges

While tracking job costs helps you understand your business better and make more money, it also requires you to put in extra time and deal with some complexities. However, for many business owners, the benefits like setting better prices, planning more effectively, and having a closer eye on finances make it worth tackling these challenges.

Who Uses Job Costing?

Job costing software is ideal for businesses focused on project-based or bespoke work where costs and activities vary significantly from one job to another. Here’s a streamlined look at who should consider it:

  • Professional Services: Firms, consultants, and marketing agencies delivering tailor-made solutions to their clients, requiring precise tracking of hours and resources.
  • Construction and Renovation: Builders, commercial contractors, and renovation specialists managing custom projects from ground-up constructions to detailed restorations.
  • Custom Manufacturing and Artisans: Workshops and manufacturers producing everything from handmade furniture to custom-engineered parts, where each item has unique material and labor costs.
  • Event Planning and Production: Companies organizing personalized events, needing to manage a wide range of variable costs to ensure successful and profitable execution.
  • Landscaping and Interior Design: Professionals designing and executing custom outdoor and indoor spaces where project specifics dictate material and labor expenses.

Job Cost Tracking Software with QuickBooks Online

QuickBooks Online provides tools specifically designed to enhance job profitability tracking for small business owners. Focusing on the core aspects of job costing offers a clear and detailed view of the financial performance of each project. Here are the features that directly support job profitability tracking:

Targeted Features for Job Profitability Analysis:

  • Detailed Expense and Income Tracking: QuickBooks Online allows for precisely allocating every expense and income directly to each job, enabling a granular view of profitability. This feature is crucial for understanding the financial success of individual projects.
  • Profitability Reports: The platform offers customizable profitability reports that provide insights into the financial performance of each job. These reports highlight the profit margins of projects, allowing you to identify which jobs are the most profitable and which may require cost adjustments or strategic changes.
  • Integrated Financial Overview: By integrating job costing with invoicing or payroll within the same ecosystem, QuickBooks Online ensures that all financial aspects of a job are accounted for in profitability analysis. This integration simplifies tracking job costs against income, offering a comprehensive view of each project’s financial health.

Now, It’s Your Turn

Understanding and implementing job costing can be a challenge for new business owners. It offers detailed insights into your costs, helping you manage your finances more effectively. With tools like QuickBooks Online, job costing becomes even more accessible, allowing you to focus on growing your business while controlling your finances. Remember, consistency and attention to detail are key to successful job costing. By regularly tracking your costs and analyzing your job profitability, you can make informed decisions that drive your business forward, with or without software assistance.

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