Job costing: formula, worked examples + free job cost sheet (5 industries)

Introduction

Job costing tracks costs one at a time: you add up the materials, labor, and overhead that go into a single order or project, instead of averaging costs across everything you make. It matters most when your work is custom and every job is different, because an average cost across all jobs hides which ones made money and which ones lost it.

This guide gives you the formula, a job cost sheet, and where job costing sits next to process costing.

What is job costing? 

Job costing (also called job order costing) tracks the cost of each individual job, batch, or project on its own, rather than spreading costs evenly across everything you produce. It fits any business where output is custom and costs swing from one job to the next: a construction firm, a custom manufacturer, an agency, a print shop, or a law practice.

The opposite case, identical units made continuously, calls for process costing instead, which we compare further down. Costing a job on its own tells you what that job really cost, so you can price the next one properly and see which kinds of work are worth taking.

Job costing formula 

A job's total cost is the sum of three buckets:

Total Job Cost = Direct Materials + Direct Labor + Applied Overhead

Direct materials and direct labor are the materials and hours that go straight into the job. Overhead covers the indirect costs that keep the shop running, things like rent, utilities, equipment, and supervision. None of them can be traced to a single job, so bring overhead in through a predetermined overhead rate, worked out at the start of the year:

Predetermined Overhead Rate = Estimated Overhead ÷ Estimated Activity

Activity here means whatever you use to spread overhead across jobs, usually direct labor hours, machine hours, or labor cost. For each job, the applied overhead is that rate times the hours (or machine time) the job actually took. A rate of $6.25 per labor hour, on a job that runs 45 hours, adds $281.25 of overhead.

Materials, labor, and overhead breakdown 

Each bucket is captured a little differently:

• Direct materials: Every material that goes into the job, at its actual cost, plus a small allowance for wastage or offcuts where that is predictable.

• Direct labor: The hours worked on the job times the labor rate. Track the hours job by job, not just week by week, or you lose the link between effort and cost.

• Applied overhead: The predetermined rate times the job's activity. It is an estimate, so it will not match your actual overhead to the dollar.

A wrong overhead rate affects every quote you produce. If you set the rate at $9 an hour when your real overhead works out to $18, every job comes in under its true cost, and you can win work at prices that never cover what it took to do it. Because the applied overhead rarely matches the actual overhead exactly, there is a gap at the end of the period. That gap, called over-applied or under-applied overhead, gets written off to the cost of goods sold.

Job costing examples by industry 

Here is where the costs tend to concentrate in five fields that use job costing:

Take a cabinet shop building a custom kitchen island. The job used $3,200 of timber, hardware, and finish. Two joiners spend 80 hours on it at $32 an hour, which is $2,560 of direct labor. At the shop's overhead rate of $18 per labor hour, those same 80 hours carry $1,440 of overhead. Add three buckets together, and the job cost is $7,200. The quote is that figure plus whatever margin the shop works to. (Figures are illustrative.)

Had the shop set its overhead rate at $9 an hour instead of $18, the same job would carry $720 of overhead and come out at $6,480. The work is identical. Every quote built on the lower rate is $720 short, and that shortfall repeats on every job the shop takes.

Job costing vs. process costing 

The two methods answer the same question for opposite kinds of production:

To work out which one you need, look at what comes out of your operation. If every order is different, and you can trace the materials and hours to one identifiable job, use job costing. If you turn out identical units continuously, where one unit is no different from the next, use process costing. Plenty of businesses run both: job costing for custom orders and process costing for standard runs.

Checking job costs against WIP inventory 

Job costing gives you a cost for every job you have open. Those same costs also sit in a single account in your books called Work-in-Process (WIP), which holds the cost of everything you have started and not yet finished. Both numbers describe the same unfinished work, so they should agree. Add up the cost of every open job, and the total should equal your WIP balance.

When the two do not match, one of your jobs is either missing costs that were never booked to it or carrying costs that belong to another job. Either way, that job cost is wrong, and so is any quote or margin you calculate from it, which is why the check is worth running at period-end. As each job finishes, its costs leave WIP for finished goods, and when it sells, they become the cost of goods sold.

Common job costing mistakes 

Underapplying overhead 

A rate set too low, or built on the wrong activity, makes every quote too cheap. Check the rate against your actual overhead through the year and adjust it.

Forgetting rework and setup hours 

Time spent fixing mistakes or setting up is still time for the job cost. Leave it out, and the job looks more profitable than it was.

Quoting before all costs land 

Material prices and subcontractor invoices can arrive after you have priced the job. Quote on the costs you have, then reconcile the actuals against your estimate.

Never comparing estimate to actual 

Once a job closes, put its real cost next to what you quoted. The gaps show you which parts of your estimating are off and by how much, so the next quote starts from better numbers.