× Freshbooks App Logo
FreshBooks
Official App
Free - Google Play
Get it
5 Min. Read

How to Calculate Job Costing | A Complete Guide for Small Businesses

Job costing is an accounting tool that allows businesses to track costs by individual jobs. Job costing is calculated by accumulating the cost of labor, materials and overhead for a specific project.

Here’s what you need to know to master job costing for small business accounting:

What Is Job Costing?

How to Calculate Job Costing

What Is a Predetermined Overhead Rate?

Job Costing Example

Who Uses Job Costing?

What Is Job Costing?

Job costing, also called project-based accounting, is the process of tracking costs and revenue for each individual project. Job costing looks at each project in detail, breaking down the costs of labor, materials and overhead. It makes fewer assumptions than other costing methods.

Job costing is commonly used in the construction industry, where costs vary widely from job to job. But it’s also used by manufacturers, creative agencies, law firms and more. Because job costing tracks costs in detail for each job, it can be a helpful tool for small business owners to evaluate individual jobs and see if any expenses can be reduced on similar projects in the future.

How to Calculate Job Costing

Job costing is calculated by accumulating the cost of labor, materials and overhead on a specific job. The accounting activities involved in calculating job costing are:

Calculate Labor Costs

Calculate how much it costs your business to employ all staff members who will work on the project per day. Multiply the payroll day rate by the amount of time you estimate you’ll need to complete the job. If you’ll rely on subcontractors for work your company doesn’t complete itself, factor those costs into your total labor costs for the job. It can help to get an estimate from each of these contractors.

Calculate Material Costs

Calculate the cost of all materials used on the job. For a construction business, this would include materials such as lumber, wiring, screws and more. You may choose to add a margin to these materials to cover other related costs including wastage or delivery fees.

Estimate Applied Overhead

Overhead is the most difficult cost to calculate, because you’ll need to rely on an approximation instead of a more exact figure. You’ll need to estimate the total overhead costs factoring into the job, including rent on your office, administrative costs and depreciation on the equipment used. Many businesses apply a blanket overhead fee to each project, such as 10 percent per job. An accountant can help you analyze your business and develop a specific approach to overhead. Or, you can calculate your predetermined overhead rate.

Written as an equation, job costing is calculated like this:

Total Job Cost = Direct Materials + Direct Labor + Applied Overhead

What Is a Predetermined Overhead Rate?

The predetermined overhead rate is a calculation used to determine the estimated overhead costs for individual jobs, during a specific time period.

Most businesses create annual budgets that include estimated overhead and estimated activity for the year. You can use these budget estimates to calculate an overhead rate to apply to each of your jobs.

To calculate your predetermined overhead rate, you use the following equation:

Predetermined Overhead Rate = Estimated Overhead / Estimated Activity

There are usually different activity estimates included in your budget; opt to use the activity that applies most directly to your company’s overhead costs, for example, your estimated direct labor hours.

Predetermined Overhead Rate Example

You want to use job costing in your construction business, and you’re looking to calculate your predetermined overhead rate to use for job costing. You estimate that in 2019, you’ll have $500,000.00 in overhead costs. You also estimate that your employees will work 10,000 hours in 2019.

Your calculation would look like this:

500,000 overhead / 10,000 direct labor hours = $5 per direct labor hour

Now that you’ve calculated your predetermined overhead rate, you can apply it to jobs for the purpose of job costing, as the applied overhead cost. For each direct labor hour worked, you’ll add $5 of overhead to the job. This is your applied overhead.

To calculate job costing, you’ll remember we use the following calculation:

Total Job Cost = Direct Materials + Direct Labor + Applied Overhead

Job Costing Example

Your law firm completed a client’s case. The total cost of your firm’s billable labor hours is $20,000 and you will bill $2,500 in material costs. Your firm has determined your applied overhead cost for the job is $8,500.

You now have all the elements you need. Here’s how to calculate job costing:

Direct Materials ($2,500) + Direct Labor ($20,000) + Applied overhead ($8,500) = $31,000

Your total job cost for your client’s case is $31,000.

Who Uses Job Costing?

Job costing can be used by businesses that create products or offer services to complete a client’s project. Job costing is most commonly used in the construction industry, but can also be used by:

  • Hospitals
  • Doctor’s offices
  • Engineering firms
  • Law firms
  • Accounting companies
  • Private investment companies
  • Advertising firms
  • Distribution companies
  • Food processing businesses
  • Film studios

RELATED ARTICLES

Save time Billing and Get Paid 2x Faster with FreshBooks

Try FreshBooks Free