If your business depends on distinct projects for its livelihood, job costing is an essential step in keeping your bottom line in the black.
But what is job costing, and why is it so important?
In this article, our experts at Sling answer those questions, provide a step-by-step guide for calculating costs, and reveal the best way to produce a better job costing analysis.
What Is Job Costing?
Job costing (a.k.a. project-based accounting) is the process of tracking costs and revenue for an individual project and using that information as a basis for estimating the expenses associated with future projects.
Though job costing can be used to gain insight into the profitability and workflow of any business, project-based industries — such as law firms, construction companies, and consulting firms — will benefit most from these numbers.
Why Is Job Costing Important?
Deciding what to charge for a product, project, or service is key to the overall success of your business.
Accurate job costing provides a number of important benefits, including:
- Balancing revenue and costs
- Providing historical data for future projects
- Improving profitability
- Streamlining employee scheduling
- Reducing the likelihood of unexpected costs
- Facilitating timely financial reporting
Even if your business doesn’t rely on distinct projects for its livelihood, job costing can reveal ways to cut expenses, improve your workflow, and increase profits in your bottom line.
How To Calculate Job Costing
Now that you know a bit about the ins and outs of job costing, let’s turn our attention to the process that makes it possible.
Here are the steps for creating an accurate and effective breakdown for any project that comes your way.
1) Calculate Labor Costs
The first step in the process is to calculate one of the largest expenses your business is likely to face: labor.
To get to the heart of your labor expenses, you’ll need to know the Actual Hourly Labor Cost of each employee who will work on the project.
That entails crunching such numbers as:
- Pay rate
- Gross hours
- Gross pay
- Net hours worked
- Other annual labor costs (insurance, taxes, overtime, benefits, etc.)
- Annual payroll labor cost
It takes a bit of doing to get to the final variable — actual hourly labor cost — but you’ll learn a lot about the labor expenses that go into keeping your business running along the way.
Here are the necessary formulas.
Gross Pay = Pay Rate x Gross Hours
Hours Not Worked = Days Missed Per Year x Number Of Hours In A Shift
Net Hours Worked = Gross Hours – Hours Not Worked
Annual Payroll Labor Cost = Gross Pay + Other Annual Costs
Actual Hourly Labor Cost = Annual Payroll Labor Cost / Net Hours Worked
To help you understand how all this information works together to yield a number that affects your process, let’s work through the hypothetical example of Employee A who will be working on the new project.
Employee A works full time at a rate of $20/hour, so their Gross Hours will be 2,080 per year and their Gross Pay will be $41,600 (Pay Rate x Gross Hours).
The previous year, Employee A received 80 hours of time off (Days Missed Per Year x Number Of Hours In A Shift) for holidays, vacation days, and illness days. Using that number as a benchmark, you can estimate that their Net Hours Worked for this year will be 2,000 (Gross Hours – Hours Not Worked).
Add in the Other Annual Costs associated with paying Employee A — benefits, taxes, and insurance comes to $4,000 — and you get an Annual Payroll Labor Cost of $45,600 (Gross Pay + Other Annual Costs).
When all is said and done, then, you calculate that Employee A’s Actual Hourly Labor Cost is $22.80 per hour (Annual Payroll Labor Cost / Net Hours Worked).
With that number in mind for each employee who will work on the project, you can produce an accurate and effective analysis that will keep your business in the black.
2) Calculate Material Costs
Material costs are the total cost of materials used to manufacture a product, provide a service, or complete a project.
You can calculate these expenses by examining financial statements from previous years and doing a deep dive into your inventory reports.
This step is pretty straightforward — adding up all expenses associated with materials you used, or will use, on a project — so we’ll get right to the numbers we’ll use in the final step of our job costing analysis.
After examining your inventory reports, you discover that, on a previous project, your team accrued $20,000 in material costs.
Step four of this process will put that number to use. But, for now, let’s move on to the third variable in our job costing equation
3) Calculate Overhead
Overhead costs are recurring expenses that sustain your business but don’t contribute to income.
These costs can be divided into fixed, variable, and semi-variable expenses and include the likes of:
To calculate overhead, first determine your monthly costs by adding up all the overhead expenses your business accrues in one month. From there, extrapolate out to the number of months you think the new project will take.
For example, let’s say that your business spends $2,000 per month on overhead. With that number in mind, you now know that total overhead costs for a four-month project will add up to $8,000.
4) Calculate Job Costing
With the three key variables — labor cost, material cost, and overhead — in hand, it’s now time to calculate the total job cost.
The formula for this final step is very simple:
Total Job Cost = Labor Cost + Material Cost + Overhead
As you can see, most of the hard work is done before you reach this final step, and a job costing analysis is pretty much finished when you have numbers for all three variables.
The only thing that’s left to do is add the numbers together to get the total cost for the job. For this example, we’ll assume that there’s only one employee — Employee A — working on the project.
We’ll also assume that Employee A will work 40 hours per week and that the project will last for one month (160 hours total).
Total Job Cost = (160 hours x $22.80 per hour) + $20,000 + $2,000
Total Job Cost = $25,648
With that analysis in hand, you know that you would need to charge the client $25,648 to break even. Add in a bit for profit and you’re good to go.
The Best Job Costing Possible
Accurate job costing can be the difference between profit and loss for your business.
The best way to manage and lower your overall job costs — and produce the best possible results — is to control the expenses that have the biggest impact on the calculation.
Which expense has the most influence on job costing? Labor.
Labor costs are one of the largest expenses that most businesses face. Get control of your labor budget to maximize and lower your labor costs, and your job costing numbers will follow.
The Sling suite of software tools can help.
Sling gives you incredible control over your schedule so you can quickly and easily create schedules one month, two months, even six months or more in advance.
And the built-in artificial intelligence automatically reminds you of requested time off, double bookings, and overtime hours so there’s less back-and-forth once you’ve completed the schedule.
Sling also acts as a time clock for your business. You can set up a central terminal or allow your employees to clock in and out right from their mobile devices. And with Sling’s powerful geofencing feature, you can prevent early clock-ins and missed clock-outs with the touch of a button.
Sling even lets you optimize labor costs by setting wages per employee or position so you can see how much each shift will cost you. You can keep track of your labor budget and receive alerts when you’re about to exceed those numbers.
This will help you save money, produce accurate job costing, and increase profits. Sling really is the go-to solution for all your scheduling and job costing needs.
For more free resources to help you manage your business better, organize and schedule your team, and track and calculate labor costs, visit GetSling.com today.