Job costing is the process of determining the labour and materials cost for each job in a systematic way, and then using this information to create a quote for the customer. Job costing or cost accounting can be used in virtually any industry to ensure that the product pricing covers actual costs, overhead and provides a profit. The purpose of any business is to make money, and job costing is the most effective way to ensure that occurs.
There are three elements to job costing: determine customer requirements, identifying job related costs and overhead. The most important item in this process is accurate tracking of time and costs associated with any job. There are a several software packages available to help business owners accurately track all business expenses. In order to provide an accurate quotation, it is very important to specify the exact requirements in writing and to obtain agreement from the client. Once the details have been finalised, you can then begin to determine the actual costs of the materials.
First, estimate the labour required to complete the job. Avoid using one flat rate, and instead calculate the time required at the actual rates, based on the skills required for different aspects of the job. Add all the labour and material costs together and calculate a contingency amount, ranging from five to ten percent. This amount covers minor changes, and additional time requirements.
Job Costing vs Process Costing
Job costing, known by some as job order costing, is fundamental to managerial accounting. It differs from Process costing in that the flow of costs is tracked by job or batch instead of by process.
The distinction between job costing and process costing hinges on the nature of the product and, therefore, on the type of production process:
> Process costing is used when the products are more homogeneous in nature. Conversely, job costing systems assign costs to distinct production jobs that are significantly different. An average cost per unit of product is then calculated for each job.
> Process costing systems assign costs to one or more production processes. Because all units are identical or very similar, average costs for each unit of product are calculated by dividing the process costs by the number of units produced.
> Many businesses produce products with some unique features and some common processes. These businesses use costing systems that have both job and process costing features.
Using a Job Costing System
In a job costing system, costs may be accumulated either by job or by batch. For a typical job, direct material, labour, subcontract costs, equipment, and other direct costs are tracked at their actual values. These are accrued until the job or batch is completed.
Overhead or "burden" may be applied either by using a rate based on direct labor hours or by using some other Activity Based Costing (ABC) cost driver. In either case, once overhead / burden is added, the total cost for the job can be determined.
In the days of computerised job costing software enlightened accountants are moving forward and using job costing software, thereby improving cost control, reducing risk, and increasing the chance of profitability.
Using Cost Codes in Budgeting
In a true job cost system, a Budget is set up in advance of the job. As actual costs are accrued, they are compared to budgeted costs, to determine variances for each phase of each job. Cost Codes are used for each phase, allowing "mini-budgets" to be generated and tracked.