Job Costing in Accounting

Job-costing is one method used in accounting.

Job costing is one method of accounting for costs within a company. In simple terms, job costing is the calculation of the costs required to perform a job subtracted from the revenue made from that job. These calculations are used to determine the profits or losses of each job done. There are three key areas in job costing.

Direct Costs

The direct costs of a job include the amounts paid for labor and materials actually used in completing a job. For example, a painter is hired to paint the exterior of a home. He uses four laborers to complete the job and pays them on an hourly basis. He calculates that he will need 10 5-gallon buckets of paint, tape for exterior windows, and 10 disposable drop cloths to protect the exterior plants and shrubbery. All of these would be his direct costs.

Indirect Costs

Indirect costs are those costs that, while there was no direct connection to the job completed, the job could not have been completed without those costs. In the example used in Section 1, the indirect costs would include the use of paint brushes, ladders, vehicles and the fuel for vehicles to get to and from the job. A 50-yard roll of tape may only require the use of 20 yards, leaving the rest to be used for another job. Applying the indirect costs of the owner's administrative time or fuel for driving to the paint store can be difficult to do. Some call the indirect costs "overhead."

Direct Costs and Inventory

To keep careful track of each direct cost involved in a job can be difficult in any type of business. It would require a careful method of inventory. The use of QuickBooks or another accounting software will help in this process. When the laborers have to complete a job, and it is necessary to remove items from inventory to complete the job, there must be an accurate accounting for the use of these items.

In the example of bulk items being purchased for a job, a box of screws or nails in which only 1/2 of these purchased items are actually used for the job, the question is do you charge the customer only for the portion of the items used or pro-rate the charge based on what percentage of items were used?

Indirect Costs and Tracking Overhead

As difficult as it is to keep track of the direct costs it is even more difficult to keep track of the indirect costs. In the example of laborers' pay, the hours they are actually working on the job are the direct costs and the hours they are in transit to the job or picking up materials are the indirect costs. If the owner of the painting company spent four hours of his day at one job, three at another and two hours at the office dealing with administrative issues, part of the indirect costs or overhead would have to include a portion of the rent and utilities of the office for that time period. Indirect costs also include the depreciation cost for equipment and vehicles used.

Indirect Costs Allocation

The question to ask about indirect costs is do you apply these indirect costs or overhead to each individual job? The other option is to apply a percentage of these amounts based on a cumulative total of the annual indirect costs divided by the number of days or hours the job takes to complete. This is called a predetermined overhead rate. The answer is, it depends on how technical you wish to be. Either method is OK to use. The predetermined overhead rate is much easier to use than attempting to calculate the cost of each nail and screw used in each particular job.

References

• Principles of Accounting: Chapter 19 - Job Costing
• Business Dictionary: Job Costing
• Business Dictionary: Direct Cost