Job Costing
Job costing is an accounting method that tracks the costs of materials, labor, and overhead for a specific manufacturing job or work order.
Job costing accumulates the expenses incurred to complete a specific project or customer order. This method is common in environments where products are unique or produced in distinct batches, such as in a job shop or for engineer-to-order products. It contrasts with process costing, which averages costs over large volumes of identical units.
To calculate a job's cost, a manufacturer tracks three main components. Direct materials are the raw materials consumed, tracked through a bill of materials (BOM) and requisitions. Direct labor is the wages of employees working on the job, tracked with time sheets or data from a manufacturing execution system (MES). Manufacturing overhead includes indirect costs like factory rent, utilities, and machine depreciation, which are allocated to the job using a predetermined rate.
Accurate job costing is essential for determining the profitability of individual orders. It provides the data needed to create precise quotes for new business. If a job's actual costs exceed its estimated costs, managers can investigate the cause. This could be an issue with material pricing, labor efficiency, or machine performance.
Manufacturers typically implement job costing using their Enterprise Resource Planning (ERP) or accounting software. Each new work order receives a unique job number. All material issues, labor hours, and other expenses related to that order are then recorded against this number. This creates a detailed financial record for every job that moves through the shop floor.
A custom cabinet shop receives an order for a kitchen island. The direct material cost for wood and hardware is $750. The direct labor cost for 20 hours of work at $35/hour is $700. The shop applies overhead at a rate of $25 per labor hour, adding $500. The total cost for this job is $1,950.
What is the difference between job costing and process costing?
Job costing tracks costs for unique, individual jobs. Process costing averages costs over large quantities of identical products, such as in food processing or chemical manufacturing.
How do you calculate an overhead rate for job costing?
First, estimate total manufacturing overhead costs for a period (e.g., a year). Then, choose an allocation base like direct labor hours or machine hours. Divide the total overhead by the total allocation base to get the rate.
Is job costing only for custom manufacturers?
It is most common for custom work, but any company that handles distinct projects can use it. This includes maintenance, repair, and operations (MRO) services and prototype development.
What software helps with job costing?
Enterprise Resource Planning (ERP) systems, Manufacturing Execution Systems (MES), and accounting software often have dedicated job costing modules. These systems help track labor and materials against specific work orders.
How does inaccurate job costing affect my business?
Inaccurate costing can lead to underpricing jobs and losing money, or overpricing and losing bids to competitors. It also makes it difficult to know which products or customers are most profitable.
Work Order
A work order is a document that authorizes and details a specific job, such as manufacturing a product or performing maintenance.
Bill of Materials
BOMA Bill of Materials (BOM) is a complete list of the raw materials, components, and assemblies required to build a product.
Cost of Goods Sold
COGSCost of Goods Sold (COGS) represents the direct costs of producing the goods sold by a business.
Job Shop
A job shop is a manufacturing facility that produces small batches of custom products based on specific customer orders.
Configure, Price, Quote
CPQConfigure, Price, Quote (CPQ) is software that helps sales teams create accurate quotes for complex, customizable products.