Job costing: What is job costing & when is it used?

Definition

Job costing is a cost accounting method used by businesses to track and allocate the costs associated with producing specific products or providing particular services.

What is job costing?

Job costing is a detailed and precise approach to cost accounting that is particularly useful in industries where products or services are custom-made or where each project or job is unique. Job costing helps businesses understand the costs and profitability of individual projects or jobs. Here’s how it works:

1. Identification of jobs or projects: In job costing, each unique project, job, or order is identified and assigned a distinct job number or code. This could be anything from building a custom piece of furniture to providing legal services to a specific client.

2. Cost tracking: Once a job is identified, all relevant costs associated with that job are meticulously tracked. These costs can be categorised into two main types:

– Direct costs: These are costs directly and specifically tied to the job. For example, direct materials (such as wood for furniture) and direct labour (wages of employees working on that particular job) are direct costs.

– Indirect costs: These are costs that are not directly attributable to a single job but are incurred as part of general business operations. Indirect costs include items like rent, utilities, and administrative salaries. In job costing, these indirect costs are allocated to individual jobs using various allocation methods, such as overhead rates.

3. Record keeping: Businesses maintain detailed records of all costs related to each job. This includes keeping track of the time spent by employees on the job, the materials used, subcontractor costs, and any other expenses directly associated with the job.

4. Cost allocation: Indirect costs are allocated to specific jobs using an allocation method that is typically based on factors like labour hours, machine hours, or square footage. This allocation ensures that each job bears its fair share of indirect costs.

5. Cost analysis: With all costs properly allocated, businesses can calculate the total cost of each job. This information is crucial for pricing decisions, as it helps determine whether a job is profitable or if adjustments are needed.

6. Financial reporting: The costs and revenues associated with each job are recorded separately, allowing for detailed financial reporting. This information can be used to generate job-specific profit and loss statements.

Job costing is commonly used in industries like construction, manufacturing (especially for custom or made-to-order products), professional services (law firms, architectural firms), and more. It provides a granular view of costs and profitability for each job, enabling businesses to make informed decisions about pricing, resource allocation, and project management.

Example of job costing

Let’s consider a construction company, XYZ Builders, engaged in a specific construction project. They receive a contract to construct a commercial building. This project is unique, and costs need to be tracked separately.

The labor costs are tracked for each employee working on the project. For example: