Job costing

Collecting direct costs by job and applying overhead, then reading a job's profit two ways.

A job costing system tracks the cost of each job separately: each house call, each custom order, each consulting project. It suits businesses whose work varies from customer to customer. Process costing, the alternative, averages costs over large runs of identical units and suits a bakery or a bottling line. Most small service businesses that quote prices need job costing, even if it lives in a spreadsheet.

Direct costs and overhead

A job's costs fall into two groups.

Direct costs can be traced to the job: materials used and labour hours spent on it, plus subcontractors, permits and equipment rented for it.

Overhead is everything else needed to run the business: the office, the dispatcher, insurance, software, unbilled time. It can't be traced to one job, so it is applied at a predetermined rate, usually per labour hour or per machine hour. Lesson 3.5 covers how to set that rate.

Job cost = Direct materials + Direct labour + Other direct costs + (Overhead rate × Hours on the job)

The job cost sheet

The record for each job, the job cost sheet, lists:

the customer, job number and description
materials issued, with quantities and costs
labour hours by person, at their cost rate
other direct costs, such as permits and disposal fees
overhead applied at the predetermined rate
the price billed, and the resulting profit

In a small business the job cost sheet is often the invoice plus a few cost columns. The requirement is that every hour and every part is coded to a job when it happens, not reconstructed later.

Two views of a job's profit

A job can be judged by its contribution or by its full-cost profit, and the two answer different questions.

Contribution, revenue less the costs the job actually caused, tells you whether accepting the job made the business better off this month. When the plumbers have idle time, any job with positive contribution adds to profit.

Full-cost profit, revenue less direct costs and applied overhead, tells you whether the job's price would sustain the business if all work were priced the same way. Quoting from full cost protects against filling the year with work that covers its own costs but not the office, the vans and the insurance.

Use contribution for short-term choices with spare capacity. Use full cost for standard pricing and for judging which kinds of work to pursue.

Hartley Plumbing has 3 salaried plumbers, each paid for 2,000 hours a year at $38 an hour. It bills labour at $125 an hour. Materials cost it $40 per billable hour on average and are billed to customers at cost plus 30%. Running the vans costs $7 per billable hour in fuel and wear, on top of their fixed leases. The plan for the year is 3,600 billable hours.

Hartley replaces a residential water heater. The job takes 6 hours. The tank costs $1,150 and fittings $160; both are billed at cost plus 30%. The city permit of $85 is passed through at cost.

Job sheet: replace 50-gallon gas water heater
	Charged $	Cost $
Tank 1,150 and fittings 160 at cost plus 30%	1,703	1,310
Permit, passed through at cost	85	85
Labour, 6 hours (billed $125, paid $38)	750	228
Fuel and van wear, 6 × $7		42
Direct cost		1,665
Overhead applied, 6 × $53		318
Totals	2,538	1,983
Job profit		555

Full-cost profit is $555, a margin of 21.9% on revenue of $2,538. Overhead is applied at Hartley's planned rate of $53 per billable hour, derived in lesson 3.5.

Contribution is higher. The job's revenue less the costs it caused (materials, permit and van running cost) is $1,101. The difference is the plumber's wages and overhead. Both would be paid whether or not this job was done, so on a slow day the full $1,101 is the gain from taking it.

Direct costs and overhead

The job cost sheet

Two views of a job's profit

A water heater replacement

Job cost sheet

Work these, then open the answers

4 questions

Sources