Job costing is a process used when you bid on a project to perform a large-scale service or produce a quantity of a product. A large contract may not do your business any good if the job is not going to be profitable. Job costing measures the revenue produced against the expenses incurred to determine the final profit earned.
The first step in the job-costing process is to identify the scope of the project or job. For a manufacturing company, this might be an order to produce 10,000 widgets. For an architectural firm, it could mean the design of a high-rise building. To accurately perform a job costing, it is important to know everything the job entails.
Step two is to identify the direct costs associated with the job. If the job is to manufacture 10,000 widgets, there are direct costs involved including the raw materials and parts needed to make the widgets. The other direct costs associated with a job are labor costs. Determine how many employee hours will be needed to complete the job and multiply it by the average hourly wage.
Select Allocation Base
In addition to the direct costs associated with a job, the project will incur indirect costs. Examples include the use of manufacturing equipment, power to run the equipment, salaries of supervisors or managers overseeing the job, lighting and even the depreciation on the machines used in the process. Allocation bases are determined by looking at previous jobs and seeing what the indirect costs totaled at the completion of the project.
Once the allocation bases are defined, indirect costs are identified for the new project. Using the widget manufacturing example, indirect costs might include the machine hours needed to make the widgets or the number of supervisor hours to oversee the manufacture of the widgets.
The cost allocation bases discussed in step three are total indirect cost figures based on completed jobs or projects. Determine a single unit rate by taking the total cost figure and dividing it by the number of single units that were produced in the prior project. This single unit rate will be used in the calculation of indirect costs for the new project.
Compute Indirect Costs
To determine the total indirect costs, take the single unit cost rate that was calculated in step five and multiply it by the number of units to be produced. This will provide the estimated total of all indirect costs.
Compute Total Costs
The final step in the job costing process is to add the direct costs to the indirect costs that have been calculated. The final figure is the estimated cost for the total project. Compare this figure with the figure quoted to the customer to complete the job. The difference between the two figures identifies either the profit or the loss for completion of the project.