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Job costing unveiled




Fun fact: your business only stays in business if it's profitable. We know, you knew that already! But ensuring profitability and growth means you have to cost jobs correctly. Simpro explores what job costing is, how to calculate total job cost and how to streamline your costing process


Job costing is the process of taking each project's individual needs, requirements and objectives of the requested work and putting a price on how much each part will cost you. Tracking costs is important, as it leads to more accurate job estimation, which leads to tighter control of your cash flow.


It's important to remember that, just like every job is different, treating job costing and process costing as a ‘one size fits all’ means you'll only lose money.

 

Decoding the job costing formula to increase efficiency


It can seem like a never-ending mathematical problem, looking at how to calculate costs for a job. However, once you break down the job costing formula (also called the job order costing formula) and understand how to calculate total job cost, you'll see the positive effects on your business in no time. You will also need to stay on top of costs by using job costing reports. We'll dive into this a little later.


Step 1: Overhead and hours


To calculate your own job costing formula, you need to determine a couple of things first. One of those is your predetermined overhead rate. This figure comes from two different areas of estimation: estimated overhead costs and estimated hours worked.


Estimated overhead includes the ongoing costs to run your business, such as rent, utilities and materials (like office supplies and software costs) and administrative salaries that can't be directly attributed to a specific job. Don't forget to include fees like insurance or taxes. Let's say that amount was $5,000 last month.


Estimated hours are the number of hours you estimate for that same time period. Let's say your employees worked 1,000 hours last month. You can use this formula:


Predetermined overhead rate = estimated overhead/estimated activity.


For our example, this is 5000/1000 = $5.


Step 2: Labour and material cost estimation


The next step is to estimate and calculate labour costs and material costs. The labour is calculated by multiplying the labour costs per hour by the estimated hours to complete the work. For example, if an employee is paid $25 per hour and the job is estimated to take 30 hours to complete, the direct labour is $25 x 30 = $750.


Material costs are the estimated cost of the materials used to complete the job. So, there's no need to inflate any figures for profit margins. If you spend $300 on materials, that is your direct material cost.


Of course, there may be points in a job where you need to re-evaluate costings around actual hours worked and additional materials. Job costing software allows you to create reports that help you understand the true costs of a job. This can help you make necessary adjustments to your pricing strategies for future jobs.


Step 3: The final total job cost


The final component of the job costing formula is the applied overhead rate. Any pay towards employees or yourself is factored into your predetermined overhead rate, so you don't have to worry about that here.


To calculate the applied overhead costs, multiply your predetermined overhead rate by the estimated hours needed to complete the work. Remember, this will need to be adjusted again once you complete the work and have the actual hours worked.


For example, if we take the predetermined overhead rate we calculated above of $5 and we use the direct labour hours from above, the formula to get your applied overhead would be $5 x 30 = $150.


Now, if we look at the total job cost based on these three figures, the formula for calculating total job cost is direct labour + direct materials + applied overhead. So, for our example, it's $750 + $300 + $150 = $1,200.


With this example, we can determine the cost to the job would be $1,200 once the work is complete. Remember, this is not the price you charge your customer but what the job will cost you.


What are the advantages of integrating a job cost formula?


Integrating the total job cost formula into your pricing scheme means more stable business growth, more predictable cash flow, optimised pricing strategy and consistency across the business. Plus, it enables you to keep a better handle on your job profitability and ensure your company always stays in the black. You won't be surprised by material or labour cost changes and can keep better informed of natural price fluctuations.


How accurate is this formula?


The job-costing formula is always accurate – as long as the numbers you put into it are accurate. As Mr. Incredible said in The Incredibles 2, "math is math". There's no fooling it. So, as long as your costs are on point, the formula will be, too. 

When is the job costing formula required?


Honestly, you should always base your job estimates and prices on how much things cost you. So, ideally, the total job cost formula is always required. That said, it can become tedious, especially if maths isn't your strong point and you're not using job management software for growth. But consistently costing jobs means your prices are more accurate and will lead to better business growth.  




If you’re looking for other ways to keep your business running smoothly, a field service management platform can help with everything from appointment scheduling and customer management to invoicing and fleet tracking.


See for yourself how Simpro could help you here: www.simprogroup.com

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