Job Costing Defined

Job costing is an accounting method designed to help you track the cost of
individual projects and jobs. It involves looking at direct and indirect costs, and
it’s usually broken into three specific categories: labor, materials and
overhead. Understanding costs for a job at this level will help you better
budget and plan for similar projects in the future, and you may discover some
ways to cut costs or find items that should be billed to the customer.

What Is Job Costing?

Job costing is a precise method of tracking all the costs and revenue
associated with a particular project. Projects might include one-off customer
undertakings, manufacturing new products or delivering multiple products that
will be developed at the same time.

Job costs are typically broken down into labor, materials and overhead —

Why Is Accurate Job Costing Important?

One of the most impactful decision a business makes is what to charge for a
product, project or service. In service industries, where the payroll costs are
often the largest line item, it can be especially important to incorporate job
costing. It’s one of the most important accounting practices for small
businesses to reach gross profit margin goals.

Job Costing vs. Process Costing

While related, it’s important to make the distinction between job costing and
process costing. In simplest terms, job costing is a means of quantifying all of
the individual costs required to deliver a unique project output like a small-
scale manufacturing run.

Process costing, on the other hand, breaks down costs over a given time
frame, which is particularly useful when the cost of individual units or job
outputs can’t easily be differentiated.

What is process costing?

Process costing is an accounting practice by which companies assign costs to

a collection of products or project outputs generated, usually within the course
of a month, and use that to calculate a unit cost. Process costing is most often
used by companies mass producing many identical or near-identical products
at once.

What’s the difference between job and process costing?

Job costing requires a company to quantify all the material, labor and
overhead costs required to manufacture a single job output, such as the
previously mentioned construction job or a limited run of a custom item.
Process costing requires businesses add all operating costs for consistent,
large-scale production of similar items over time, such as white label rubber
gaskets, paper straws or smartphones.

Job Costing Process Costing

How it Assign costs to the delivery of Assign costs for projects that deliver many
works individual jobs, products or units of the same output.
services.

How it's The total labor, material and Per unit cost of labor, material and output,
calculated overhead costs for a specific job. based on the total cost of delivering many
units over a given time frame.
 Job Costing Process Costing

When it's Generally used in projects involving Helpful on projects that consistently deliver
used multiple workstreams with different the same products at scale, where there is
outputs and stakeholders. opportunity for continuous streamlining.

Who Uses Job Costing?

Almost any type of business that provides products or services to clients
stands to benefit from job costing. The process can help you better
understand your own costs for things like products, parts and even how
to manage your payroll more efficiently. The practice is often associated with
construction companies, as they work with a rolodex of third-party contractors
and each job is different. However, job costing is gaining traction in other
industries, including:

 Marketing and advertising agencies: Marketing and advertising agencies

must factor both direct costs and period expenses into their job costing. Period
expenses refer to costs that grow over time, like rent, office supplies and
utilities.

 Construction companies: With complex projects that involve an enormous

volume and range of materials, as well as partnerships with multiple
subcontractors, construction companies rely heavily on job costing to deliver on
budget and remain profitable.

 Energy utilities: Delivering energy to a city or region incurs many costs,

including for staff, delivery mechanisms materials, overhead and the energy
itself. Job costing is the key to staying profitable in this low-margin sector.

 Engineering offices: Engineering projects frequently vary in scope and length,

from one-off building designs in the case of residential engineering to multiyear
consultancy and site-supervision work in the case of public construction and
 civil works. In all of these cases, a detailed breakdown of labor and overhead
costs is crucial to accurate project scoping.

 Manufacturers: In the manufacturing sector, profit margins are often defined by

scale. Smaller jobs tend to require manufacturers to break even or remain
profitable, even if it requires minimum order quantities to do so. Larger jobs can
be priced more aggressively as profits add up when delivering many units. Job
costing can help manufacturers evaluate their costs accurately and account for
labor and overhead costs, not just materials.

How to Calculate Job Costing

Rather than simply analyze performance from financial documents such
as income statements and balance sheets after a job is complete, job costing
helps you dig deeper into more granular costs associated with specific
projects or jobs. The basic formula includes adding together the costs of labor,
material and overhead. But to calculate the cost of a job accurately, it takes
meticulous analysis of each step and component of these three areas.

 Calculate labor costs.

This is the cost of paying all the employees involved on a particular project,
including third parties and subcontractors. To calculate labor costs, multiply
each employee’s payroll daily rate by the number of days spent working on a
specific job.

Labor costs = (Number of working days x daily pay rate x number of workers)

This calculation assumes all workers will work the same number of days and
receive the same daily pay. But the formula can be performed for as many
 individuals or groups as needed to accommodate different pay and hours
worked, and then the costs can be summed at the end.

 Calculate material costs.

This includes both direct material costs (materials that comprise the finished
product) and indirect material costs (materials that are required to finish the
job but aren’t part of the final product). Direct costs typically include raw
materials, whereas indirect costs might include things like the tools or
machinery used to manufacture goods or office supplies. To calculate material
costs, add all direct and indirect costs.

 Calculate overhead.

Overhead costs can be some of the most challenging to accurately estimate,

as they require managers to break down the company’s daily operating costs
and attribute the right proportion to their project. Their goal is to account for
the total overhead needed to complete a project, including rent on a
company’s office spaces and manufacturing facilities, electricity, internet and
other business expenses. Given the difficulty, businesses sometimes apply a
blanket overhead fee to each project, such as 10% per job.

Job Costing Example

Consider a luggage company that has assigned 10 employees with the task of
manufacturing 20,000 new backpacks in time for the new school year. The
team has four working weeks (20 business days) to complete the order. The
project manager expects to work full time during that period, at a rate of $500
per day. Two warehouse managers and two supply chain managers will each
work three days per week (12 days total), at a rate of $350 per day. Five plant
employees will work full time to manufacture the backpacks themselves, at a
rate of $200 per day.
For labor, (20 days x $500 x 1 person) + (12 days x $350 x 4 people) + (20
days x $200 x 5 people) = $46,800

Added to this are direct material costs of $20,000 for the polyester, zippers
and additional fabrics used in the bags themselves, as well as indirect costs of
new machinery and office supplies, which also add up to $20,000. Added
together, total material cost is $40,000.

Finally, overhead costs for the four weeks are estimated at an additional
$10,000. Add that to $46,800 in labor and $40,000 in materials, and altogether
our project cost equals $96,800.

Cost of production report (CPR) –

Definition and explanation
The cost of production report (CPR) is a document used in process costing
system that summarizes information about the flow of units and costs through the
work in process account of a processing department. It is equal to the job cost
sheet prepared in a job order costing system. A separate cost of production report is
prepared for each processing department.

The cost of production report is considered a key management document because it

provides managers with the following crucial information about output produced and
cost incurred by a processing department:

1. The number of units transferred in and transferred out by a department during

the month.
2. The per unit processing cost incurred by a processing department. It includes
total per unit cost (i.e., total cost incurred divided by total output) as well as
per unit cost for individual cost elements like direct materials, direct labor,
and manufacturing overhead.
3. The highest production cost among materials, labor and manufacturing
overhead.
4. The impact of a recent improvement in production process on per unit cost in
a processing department.
5. A significant change in per unit cost due to unexpected change in one or
more cost elements like direct materials, direct labor and manufacturing
overhead.
 6. The hurdles or limiting factors present in one or more processing departments
that could potentially disturb the overall output efficiency of the firm.

Other names used for cost of production report are production cost report and
production report.

Sections or parts of a cost of production

report
A cost of production report consists of the following three sections/parts:

1. Quantity schedule section

2. Cost per equivalent unit section
3. Cost reconciliation section

Let’s briefly describe the purpose of each section.

1. Quantity schedule section

Quantity schedule is the first section of a cost of production report. This section
summarizes the flow of physical units through the relevant processing department
and shows the equivalent units for materials and conversion costs. The percentage
of completion of any units in work in process beginning and ending inventory is also
shown in this section. The quantity schedule also guides in preparing the other two
sections of the cost of production report.

2. Cost per equivalent unit section

In this section, the cost per equivalent unit is computed. Under weighted average
method, it is done by dividing the total of beginning inventory cost and cost added
during the period by the equivalent units of production computed under weighted
average method. Click here to read how equivalent units of production are computed
using weighted average method.

3. Cost reconciliation section

In this section, the cost charged to the department is reconciled or accounted for.
Usually, the total cost charged to a department consists of the following:

 Cost of beginning work in process inventory

 Materials, labor overhead costs incurred by the department during current
period
 Cost transferred in from preceding department during the period
The total of above costs is accounted for by computing the following amounts:

 Cost of units transferred to the next department or finished goods storeroom.

 Cost in ending work in process inventory.

Example
The Jessica Company produces a product used to clean mirrors and head lights of
vehicles. The company uses a process costing and has two processing departments
– department X and department Y. The processing starts in department X where
three different chemicals are mixed together in equal proportions. After mixing in
department X, the partially completed units are transferred to department Y. The
following data has been taken from department X.
 Required: Using above data, prepared a cost of production report of
department X for the month of January.

Solution