Within any business you want to make sure you’re costing jobs correctly, to maintain profitability and growth. And within the trade industry it’s always changing depending on the type of work required, so it’s very much a case-by-case basis. A lot of the variables can fluctuate and sticking with a well thought out, solid job costing formula is the difference between driving profitability and hemorrhaging money.
What is Job Costing?
Job costing is the process of taking into account each customer's individual needs, requirements and objectives of the work and costing each independently. Tracking costs is important in most field service industry jobs, from larger scale projects, service, maintenance work to even smaller repair jobs. For the best results, each individual job should be treated differently and priced respectively.
For example, there are jobs that sometimes seem like the same service but end up requiring a lot more labor, time or materials. If you treat job costing and process costing as a "one size fits all", you may end up losing money.
There is another type of cost accounting known as process costing. Process costing takes into account all of the variables contributing to one or more processes, and the cost will be determined by the process as a whole. It’s usually used in industries where there is mass production of similar products with similar production costs. For example food and drink, confectionary and paint are all produced in bulk. So, when choosing job vs. process costing, having a standardized process where the same job repeats multiple times suits process costing systems.
So how do you differentiate between job costing vs. process costing? In a nutshell, job costing takes into account individual customer's needs and the labor, time and materials required and is specific to the job. The final cost is then calculated once the work is completed. Process costing is the cost calculated based on one or more processes happening on a regular basis and can be determined before the work is completed and is based on the number of units produced.
Understanding The Job Costing Formula
As a project manager, it can seem like a never-ending math 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 it works, 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 will dive into this a little later.
Let’s start at the beginning. In order 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 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 to calculate:
Predetermined overhead rate = estimated overhead/estimated activity
For our example, this is 5000/1000 or £5.
The next step is to estimate your labor and material costs for the specific job. The labor is calculated by multiplying the labor costs per hour by the estimated hours to complete the work. For example, if an employee is paid £18 per hour and the job is estimated to take 30 hours to complete, the direct labor is £18 x 30 = £540.
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. So the estimate is likely to differ from the final cost to the customer, but the important thing is to remain transparent and keep communication open with the customer about this.
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, you will need to multiply by the estimated hours needed to complete the work. This will need to be adjusted again once you complete the work and have the actual hours worked. Multiply your predetermined overhead rate by direct labor hours.
For example, if we take the predetermined overhead rate we calculated above of £5 and we use the direct labor 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 the three figures we’ve got (this is the easier part!) the formula for calculating total job cost is direct labor + direct materials + applied overhead, so for our example it would be £540 + £300 + £150 = £990
With this example, we can determine the cost to the customer would be £990 once the work has been completed.
Utilizing Job Costing Reports
Now you’ve got the job costing formula under your belt, know the difference between job order vs. process costing, and understand the importance of pricing work accurately, it’s time to look at job costing reports and how they can help your business. They’re an essential tool for any field service business as they allow you to analyze and monitor the cost progress of jobs. For example, you can take a look at the actual costs of an ongoing job and measure them against your estimated costs. They allow you to evaluate a job’s performance and pinpoint any discrepancies.
A common type of report that goes hand-in-hand with job costing is the work-in-progress report, or WIP for short. A WIP report can be used in conjunction with a job costing report against any jobs that are partially completed or still ongoing. They normally run towards the end of the calendar month or accounting period, with the intention of analyzing the total costs accrued for specific jobs up to that point. You can then see any remaining payments that are due to come into the business for any partially completed jobs. At the end of the day, the more visibility you have into your business finances, the more efficiently you can manage costs.
3 Tips For Creating and Using Job Costing Reports Effectively in Field Service Management
Understanding the difference between job order costing vs. process costing and getting to grips with job costing reports is all well and good. But to fully utilize the two together, follow these tips and guidelines:
- Keep a close eye on the costs. Don’t become complacent with reporting, and make sure you’re regularly looking at job progression. The last thing you want is to go weeks thinking a project is on-track, only to discover it’s over budget. It results in a very uncomfortable conversation with the customer or the business absorbing the additional costs, affecting your bottom line.
- Stick with regular consistency. Get into the habit of reporting regularly and with consistency. Whether weekly, monthly or quarterly, just make sure you don’t let things slide by the wayside. It’s essential to stay in touch with visibility and profitability.
- Get specific. Don’t be afraid to get specific with reporting to retrieve the information you need for each job. Depending on the software, there are most likely going to be a lot of different variables to play with. It may take a few tries and a couple of dead ends but stick with it.
Integrating Job Costing into Your Field Service Management Software
Knowing the difference between process costing vs. job costing, following a consistent job costing formula and keeping profitability in mind helps drive business growth. And with field service software, analyzing specific job details and looking at where your business is generating revenue is a huge step toward having a technology-based workflow. So where does job costing fit into all of that?
As long as you remember the job costing formula, you’re on the right track. It can be done manually every time, but that can also become tiresome and very tedious. A lot of accounting software integrates with field service management software, killing two birds with one stone. So why not let that do the heavy lifting? It speeds up the time taken to calculate a job’s cost and leave you with extra time to focus on other areas of the business.
With in-depth reporting features based around different areas of a job, and the ability to filter or select specific categorization, you gain knowledgeable insights into a job’s progress and profitability. You can then use this information to adapt workflows that are not bringing your business the best results.
For example, if you’re running a report on how much a job in progress has cost your business based on materials and labor, you can then look at your original estimate for the work and ensure it’s on track for what was initially planned. With the nature of field service work, sometimes unforeseen circumstances can add to costs, such as poor weather conditions or additional materials required. So using a dedicated reporting system allows for complete visibility.
In order to keep your business in the green, you’ve got to understand how to track profits and revenue. Keeping on top with an accurate job costing formula is just the tip of the iceberg, but a very important iceberg nonetheless. If you’re looking to expand your knowledge further, take a look at our job costing tips for field service businesses.