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April 4, 2024

Job Costing: A Guide

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Accurate, efficient job costing is a crucial part of an organization’s ability to forecast, plan, and budget properly. Yet many firms still struggle to get it right, as ineffective job costing processes are time-consuming and error-prone—particularly when it comes to tracking labor costs.

Some organizations use complex codes to track time and labor by project, subtask, work orders, client, equipment, or part numbers. Coupled with processes and platforms that don’t offer automation, these functions leave room for human error that can negatively impact billing, invoicing, and budgeting accuracy. Plus, outdated time collection systems make it hard for employees to track their hours in multiple locations or switch between jobs or cost codes—which leads to inaccurate paychecks and a poor employee experience.

A deep understanding of how job costing works can help organizations evaluate and choose a time and attendance system that facilitates accurate job costing around labor and creates precise, automated reports for payroll to ensure accurate employee pay. Below, we’ll discuss everything you need to know about job costing, including why it’s important, which types of organizations use it, the calculation process, real-world examples, and benefits of using job costing software.

What is job costing?

Job costing is a process organizations use to track the costs and revenues of a job or project. It involves calculating the cost of labor, materials, and overhead to compare estimated expenses against actual costs. Many organizations use codes to track time and labor at a granular level, such as by project, subtask, work orders, client, equipment, or part number. These codes are often complex, and they require precision to ensure accurate invoicing, billing, and budgeting.

Organizations use job costing in different ways depending on their industry and the types of projects they do. For example, a construction company might use job costing to bill clients accurately, while a marketing firm might use it to make sure resource costs align with project budgets. When done correctly, job costing offers many benefits to the organizations that use it, their customers, and their employees.

Why is job costing important?

Effective job costing is essential for boosting an institution’s bottom line through greater accuracy, compliance, and efficiency while optimizing its employee experience. It also benefits clients, as it allows organizations to provide their clients with accurate, detailed billing. Through accurate job costing, organizations can:

  • Ensure accurate billing and invoicing: For many businesses, building a job costing process is essential for accurately billing and invoicing their clients. They need to know how to bill the customer and itemize the invoice properly, based on factors like the number of hours worked across positions or on specific equipment. Effective job costing—especially when backed by powerful software—helps them get it right every time.
  • Maximize profitability: When they track their costs accurately, organizations can more precisely budget around their biggest expense, which—more often than not—is labor. This, in turn, enables them to bid accurately on future jobs to avoid job cost overages or lagging productivity.
  • Control costs: Job costing enables organizations to consistently compare labor cost tracking against a set budget, use the insights they gather to improve payroll accuracy, and course-correct the process as needed. This provides greater cost control for jobs, projects, and grant initiatives.
  • Execute better management decisions: Timely, data-driven decisions are critical to an organization’s ability to remain competitive. By accurately tracking job costing data, companies gain a comprehensive view of what’s working, what’s not, and how to make impactful changes that drive success.

While job costing is more common in certain industries than others, it can help many types of organizations streamline labor and other project-related costs.

What’s the difference between process costing and job costing?

Though process costing and job costing are related, they serve distinct purposes. As we covered earlier, job costing helps organizations better understand and improve their processes by breaking down all of the costs associated with an individual job, project, or grant. It’s best for one-off projects, personalized products, or the manufacturing of a smaller batch of items.

Process costing, on the other hand, is the practice of calculating the unit cost of each individual item manufactured during the mass production of a product. For example, a company that manufactures tennis shoes might use process costing to evaluate the cost of producing a mass quantity of a particular type of shoe. It’s beneficial to the company because it enables them to determine their exact operating costs for producing that specific item at scale. While process costing is primarily used in manufacturing, job costing is used in various industries.

Who uses job costing?

Since one of the primary benefits of job costing is achieving cost efficiency, it appeals to organizations across the private and public sectors. Industries that use this method can include:

  • Advertising agencies: To determine the amount they’ll need to bill for creative projects, advertising firms can use job costing to help them break down specific costs. For example, they may bill $600 for an overall project, then break it down further into $250 per hour for graphic design work vs. $350 per hour for videography. Tracking this kind of information also helps them to bid on future jobs more accurately.
  • Healthcare organizations: For healthcare organizations, job costing enables better tracking of time spent with each patient, particularly in a hospice or home care setting.
  • Retailers: Retailer warehouses use job costing to track the customers they’re servicing and equipment they’re using.
  • Engineering firms: The cost of labor, materials, and overhead is crucial for both one-time engineering projects and longer-term consulting jobs. A detailed, accurate account of these factors allows these firms to bill their clients correctly and establish solid working relationships with them.
  • Transportation providers: Tracking the factors involved in transportation costs—including driver pay, delivery speed, and vehicle maintenance—gives providers a better view of their operational costs so they can pursue more cost-effective and profitable contracts.
  • Construction companies: Job costing allows construction companies to stay on budget, bill and invoice accurately, and make sure workers receive accurate pay.
  • Manufacturing facilities: Calculating the cost of labor for various roles, time spent using different equipment or working on projects for different clients, and other factors is a complex process. These facilities depend on job costing to maintain or improve their profit margin as they complete both large- and small-scale jobs.
  • Higher education: Colleges and universities record and report on the work contributed to each of the grants they receive. With accurate job costing, they can understand how grant money is being used.

Some industries use job costing more than others, and the way an organization applies it depends on the type of work they do. But calculating it involves the same general process—and challenges.

Find out what TCP’s TimeClock Plus Job Costing solution can do for you.

How to calculate job costing

Job costing calculations involve adding the costs of all of the resources required to create a product or complete a project. To calculate job cost manually for a particular project or product, an organization must:

1. Calculate labor costs

Calculating labor is already a complex process. For example, pay rates differ by position and different positions may follow separate overtime, shift differential, or union rules. When you layer in job coding elements, labor costs are also driven by cost codes by project, subtask, work orders, client, equipment, or part numbers. Accounting for these factors can be time-consuming and error-prone.

This is why calculating labor costs—and job costing in general—is so crucial. Precise calculations give organizations the data they need to make informed operational decisions. Getting it right means you’re able to protect your organization, bill clients fairly and retain customers, and pay employees accurately and on time.

2. Calculate material costs

Material costs include any expenses that workers use to complete a job. Materials for a tennis shoe manufacturer, for instance, might include fabric, rubber, and plastic, as well as the machinery required for cutting, sewing, and assembling the sneakers. To calculate material costs, organizations add the totals of the costs associated with a job, project, or order.

3. Calculate overhead

Overhead calculations involve estimating a multitude of variables, and while some overhead costs are predictable, others can vary by project or change over time. To calculate overhead, organizations add the costs of all of their operational expenses.

In our example of the tennis shoe manufacturer, overhead costs may include:

  • Rent for office spaces and manufacturing facilities
  • Internet service
  • Utilities
  • HVAC
  • Marketing and advertising
  • Insurance
  • Legal fees

Learn how much you can save with TCP Software.

Job costing example

Let’s take a closer look at what job costing might entail for a tennis shoe manufacturer.

With spring around the corner, ABC Shoe Company has decided to manufacture 10,000 pairs of a new athletic shoe. They’ve assembled a team of five workers to complete the job over the course of two months (40 working days, or eight business weeks). This includes a project manager, who earns $3,000 per week; a warehouse manager and supply chain manager who each make $300 per working day; and two facility employees who earn $150 per working day.

This means the labor costs are as follows:
(8 weeks x $3,000 x 1 project manager) +
($300 x 40 days x 2 managers ) +
($150 x 40 days x 2 facility employees)
$60,000

Next, the company will calculate material costs by adding up material expenses. This includes the rubber, plastic, and fabric used for the shoes, as well as the cardboard and tissue paper used for shoe boxes—all of which add up to $15,000. Additional materials required include new sewing machinery and office supplies, which cost $10,000, bringing the sum of the materials for this project to $25,000.

Lastly, the organization must estimate their overhead costs for manufacturing the new shoes. They consider manufacturing facility and office space rental fees, electricity, air conditioning, advertising costs, and a few other ancillary expenses for a total of $15,000 over the two-month time period.

When they add up their labor, material, and overhead costs, the shoe manufacturer’s new project comes to a grand total of $100,000.

Of course, the above example is a simplified version of how job costing might actually shake out in the real world. Plus, the shoe manufacturer likely has several other projects to calculate, track, and report on at any given moment, adding to how complicated it is to effectively track job costing in reality. Because of the complexity of labor expenses, in particular, this manufacturer likely uses specialized software that automatically calculates labor costs based on specific codes. Automating these cumbersome and error-prone calculations make it easier for the organization to collect accurate data, implement efficient processes, and ensure they bill customers and pay employees correctly.

Benefits of using software for job costing

While using unspecialized job costing software might seem like an easy way to save money, it’s more likely to lead to unnecessary expenses due to human error and inefficiency. Organizations looking to grow or maintain a more complex operation without sacrificing profit or employee satisfaction need a purpose-built solution to make sure they get it right.

Specialized software can use job costing data to track labor accurately, which in turn helps streamline the entire job costing process. The right tool offers:

  • Data accuracy: Understanding where and how employees spend their time requires complete data accuracy around employee hours. With automated software, organizations always have reliable data across every job, employee, location, etc.—even if they have several levels of cost codes. This is essential for making informed business decisions on the fly.
  • Reporting features: Robust reporting on multiple levels is essential for analyzing costs by job, project, employee, department, and more. Advanced software even includes features for fully customizable reports that help organizations improve processes and KPIs.

While there are several types of tools on the market, the most beneficial software is one that’s part of your holistic time and attendance solution.

Automate your labor tracking and job costing process with TCP Software

Effective job costing is crucial for organizations looking to maximize profitability, control costs, and ensure accurate billing for their customers. A successful process can boost an organization’s bottom line and help improve the employee experience, too. But getting it right requires flexible tools that eliminate the time-consuming, error-prone tasks often associated with tracking labor costs.

TCP helps organizations manage labor tracking and job costing effectively with tools that enable them to:

  • Seamlessly create, assign, and customize job codes and job costing levels
  • Give employees easy access to the cost codes that are relevant to their specific roles
  • Incorporate multi-level job costing codes for in-depth reporting
  • Import job costing codes and data from ERP and HCM systems
  • Run pre-built or custom reports that allow the organization to evaluate costing by factors like job, project, employee, or department
  • Use precise job costing data for billing, invoicing, and reporting
  • Offer easy time collection options—no matter where they work or how many jobs they’re working on—to easily switch between codes throughout the day

With labor tracking and job costing that improves accuracy, efficiency, compliance, and the employee experience, TCP can help your organization maximize its bottom line.

Learn more about how your organization can gain valuable workforce insights with labor tracking and job costing by downloading our eBook, or speak with an expert to see how TCP can help your business streamline its time and attendance processes.

Job costing FAQs

Construction companies, for instance, use job costing to identify the material, labor, and overhead costs associated with each project. They’ll estimate the total cost of a project by breaking down the cost of construction materials, labor, and overhead, such as rent for office spaces and on-site portable restrooms.

Job costing systems are tools that eliminate the burden of complex job costing processes and help users automatically track the costs tied to their projects and products. Some systems offer features for tracking multiple levels of employee work, so organizations know exactly how much time they're spending on specific jobs, tasks, or equipment. They deliver detailed insights into the workforce and help businesses identify and resolve issues that can hinder productivity.