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Understanding Job Costing in Accounting: A Comprehensive Guide

Sharissa Barnett Jan 19, 2024 11:11:36 AM
business women working on job costing at her firm

Most accountants use job costing. But have you ever wondered what it really is and how it affects business? Well, it's an accounting tool that lets you know how much your project costs. The whole costing process isn't easy but it enables you to look at each item in a project and understand whether it's generating profit or making losses. This will help you prepare an accurate budget the next time you want to do a similar project. 

So, what is job costing in accounting? Well, job costing accounting simply means you get to understand the cost of labor, materials, and any overheads. 

Understanding these types of expenses will help you to know where you should cut costs and save money or where you should allocate more resources and get the best outcomes in your work.

But who benefits from these costing methods? small businesses like the ones manufacturing items like lots of T-shirts. Others like those constructing a house or offering a service will also benefit from job costing. They'll be able to track the expenses of a project or a job and then balance them with their revenue to make a better profit. 

To learn more about job costing and how job costing systems can make your accounting easier and faster, here is a guide.

Characteristics of Job Costing

Job costing is not the only costing method in accounting. There are others like batch, process, and contract costing. 

Although all these methods are important, they aren't the same. Understanding their characteristics and differences will help you know how to apply them.

The difference between Job Costing and Process Costing

The job costing will help you identify all the individual costs of delivering a specific product or service. On the other hand, process costing will help you calculate your profits when you're producing many identical products over a long time. 

Job Costing Vs. Process Costing

Job Costing

Process Costing

Shows the cost you use to produce an individual product or service.

Shows the cost you've incurred to deliver many items.

You'll calculate costs like labor, overhead, and material for one item.

You'll calculate the cost of producing many items.

It's best for projects with different outputs and stakeholders.

It's best for projects that produce many items continuously. 

Difference between Job Costing and Batch Costing

As an accountant you may want to calculate the cost of one product or service your business is working on. The best costing method to use is job costing. 

But if your business is producing many items in groups or batches, then the batch costing method is your best bet. It's a method you'll use if it's impossible to calculate the cost of one item. Instead, you calculate the cost of a batch or a group of items. 

Businesses sometimes produce products or services in groups or batches that can only be calculated collectively. The result you get is the cost of a specific batch of items or services,

Difference Between Job Costing and Contract Costing

Compared to job costing, contract costing tracks the expenses of a long-term project. 

The tracking you'll do will last for the duration of a specific contract. You can use contract costing if you're working in fields like civil engineering or any construction industry.

Features of Job Costing

When estimating the cost of producing a specific product or service you might not be able to capture all the expenses. There's a likelihood that you'll encounter some overruns. Here is where job costing helps out. It lets you identify and correct any overrun you may encounter now or in the next project. 

In fact, understanding the features of job costing ensures you perform your calculations correctly. These features include:

  • Use it when you're producing items or services that are unique and require different resources and processes.
  • You'll need to allocate labor, equipment, and materials costs.
  • Track and compare the costs of each job.
  • You'll need accurate pricing of goods and services for each job.
  • Use detailed information on each job to analyze and produce financial reports.

How do You Calculate Job Costing?

job costing accounting calculations

For an accurate job costing add all direct materials + direct labor + all overhead costs. Here's how you calculate each cost.

Material costs

To know how much money you'll spend on the material of a product, you'll need to identify all the costs of direct materials and their associated costs of production. 

Direct costs are the raw materials that will make the product. This is what you see on a completed item. 

While indirect costs can be office supplies or machinery that you'll need in the process of making an item. 

To get the total material cost, you'll add all the direct and indirect material costs.

Direct Labor

Labor is critical in producing any individual item or service and you'll need to include it in job costing accounting.  You can track the cost of labor like wages, using a timesheet, time ticket, or a job card. It involves preparing and analyzing wage summaries for each period, such as weekly or monthly. 

For example, to get the total weekly labor cost, you'll multiply (the number of days worked x daily pay rate x number of workers).

Overhead Costs

Accountants usually add overhead costs at the end of an accounting period once the job is done. So if you need the overhead cost in job costing, you can accumulate a cost center and a standing order number. 

Job Costing Examples and Solutions

 A business can receive three different orders. For example, developing a website, creating a business card, and designing a T-shirt. You'll need to do a job cost accounting for all these orders.

First job: Developing a website

Material cost: $300 (web hosting and digital materials)

Labor cost: 30 hours and $20 per hour $600

Overhead cost: $100

Total job cost: $300+$600+$100 =$1000

Second job: Creating a business card

Material cost: $150 (sample and digital material)

Labor cost: 10 hours at $20 per hour = $200

Overhead cost: $50

Total job cost: $150+$200+50=$400

Third job: Designing a T-shirt

Material cost: $200

Labor cost: 15hours at $20=$300

Overhead cost: $150

Total job cost: $200+300+150=$650

Job Costing Advantages and Disadvantages

The advantages of job costing are many, but there are also some disadvantages associated with calculating these figures. Here are some of the advantages:

  • Job costing helps you understand the cost of producing each item.
  • It shows you the profit or loss of each project you work on.
  • It enables you to prepare the correct budget for the next project.
  • You can track operations from start to finish

Disadvantages of Job Costing

Although job costing accounting is beneficial to many small businesses, it's likely that you'll find it cumbersome and end up. It can also consume lots of your time. 

For example, it can take hours or sometimes days to keep track of all the material, labor, and overhead costs for businesses that receive lots of orders. That is time you can use to work on other productive areas in the business. The best alternative is using efficient job costing systems. 

Job Costing in QuickBooks

As an accountant who wants to save time and produce accurate figures for your next budget, job costing in the QuickBooks desktop version will do the trick. You'll get it in the QuickBooks Enterprise version, where you can use different QuickBooks Apps that satisfy your business needs. 

The desktop version is a valuable tool for almost all businesses, including construction, marketing, consulting, retailers, manufacturers, and even the health industry.

Benefits of Job Costing in QuickBooks

With QuickBooks desktop, you get remote access to tools that let you effortlessly perform your job costing accounting duties. You'll confidently say goodbye to tedious paperwork, formulas, and calculations and instead produce error-free financial reports. Its features are designed for any business that is doing job costing. It enables you to:

Share Files and Collaborate

You'll easily collaborate with multiple users especially if you're working on the same project. You'll be able to make changes to a document and share them automatically with colleagues over the Internet. 

For example, when making the changes, the job costing system accounting software locks the document to protect your work. Once you're done, it will sync the document and unlock it for other users to view.

Share QuickBooks Attachments

As an accountant, you may want to share an attachment or a document that's important for your job's cost accounting work. QuickBooks lets you share attachments like PDFs, TIFFs, JPEGs, and PNGs. 

It also makes access to such documents easy for all your team members, which saves time and allows you to complete projects faster.

QuickBooks Makes Job Costing Simple and Fast

Accountants are constantly bombarded with lots of work, including analyzing and presenting financial reports. As an accountant, the last thing you need is to deal with formulas and calculations that are time-consuming and prone to human error. That's why a job costing accounting system is the best solution for producing error-free reports, collaborating with colleagues, and saving valuable time. 

Sign up to use QuickBooks, a job costing accounting system that makes your job costing process simple and fast. New users will get a free trial for the first 30 days.

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