Job costing, or project-based accounting, is consists of tracking costs and revenue for each individual project. Job costing looks at each project in depth, breaking down the costs of labor hours, materials, and overhead, making fewer assumptions than other costing methods.
What is job costing in accounting?
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 is usually broken into three specific categories: labor, materials and overhead
Job costing has three primary goals:
Understand profit or loss of each job. Job costing looks at each element involved in a specific project so you can track profitability of each one.
Compare to estimates. By analyzing how successfully you manage estimates, you can better price jobs in the future. The purpose of job costing is to ascertain the profit or loss made on each job.
Uncover inefficiencies and excess costs. Things like repetitive work that could be automated or poorly allocated employee resources can be addressed in future projects.
Take the example of a construction company hired to build a high-rise for a real-estate developer. The construction company will estimate every cost and then track every charge involved in delivering the project, including material and equipment costs, team and subcontractor salaries and administrative expenses. Depending on the terms of the contract, the builder may share these details with clients so they can see the breakdown of costs. Additionally, in the future, the construction company can better quote and plan for similar projects armed with specific, real-world examples.
Why Is Accurate Job Costing Important?
One of the most impactful decisions 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. Accurate job costing can improve profitability, help you better manage employee scheduling and be a key component of prompt financial reporting. Proper job costing leads to better profitability, project estimating, management decisions and timely financial reporting.
Accurate job costing helps businesses strike a balance between revenue and costs on any given project by carefully analyzing each step of the job and using historical data to better inform future projects. Meticulous job costing reduces the likelihood of unexpected costs during the project life cycle, which can quickly eat into profit margins and lead to disputes with customers.
Accountants and finance departments rely on job costing for back-office processes and tax filing. For example, itemized costs help accounting teams accurately analyze how project expenses can fit into the company’s overall financial picture.
Who Uses Job Costing?
Almost any type of business that provides products or services to clients benefits 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
Transportation and logistics providers
Health care and life sciences organizations
Did you know that one of CBBS’s specialties is Job Cost Accounting? Our CEO Donna Sovie spent 15+ years working in the construction industry as an accountant and controller.
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