Fun fact: your business only stays in business if it's profitable. We know, you knew that already. But ensuring profitability and growth means you have to cost jobs correctly. And within the trade industry, things are always changing. Depending on the type of work required and the cost of materials and labor, variables constantly fluctuate.
Job profitability relies on using the job cost formula and pricing jobs appropriately. So let's dive into what job costing is, how to calculate total job cost and how to streamline your costing process.
What is Job Costing?
Job costing is the process of taking each project's individual needs, requirements and objectives of the requested work and putting a price on how much each part will cost you. Tracking costs is important in most field service industry jobs, from larger-scale projects, service and maintenance work to smaller repair jobs. It leads to more accurate job estimation, which leads to tighter control of your cash flow.
With job costing, it's important to remember that just like every job is different, treating job costing and process costing as a "one size fits all" means you'll only lose money.
The importance of job costing
Depending on your trade and the type of jobs you do, it may be tempting to offer flat rates for some services. And honestly, that's a good strategy for a lot of things. The importance of job costing lies in you understanding of what goes into each job.
Jobs vary in difficulty. Travel to each site differs based on each employees schedule, weather and traffic. There are jobs that sometimes seem like the same service at first glance but then end up requiring a lot more labor, time or materials. As long as you know what you're getting into with each job, you can determine the proper pricing structure to keep your business profitable.
Decoding the Job Costing Formula to Increase Efficiency
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 to calculate total job cost, 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'll dive into this a little later.
Step 1: Overhead and hours
Let's start at the beginning. 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 costs and estimated hours worked.
Estimated overhead includes the ongoing costs to run your business. Costs including: 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 = $5.
Step 2: Labor and material cost estimation
The next step is to estimate and calculate labor costs and material costs. 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. Having a job costing software allows you to create reports that help you understand the true costs of a job. This can help you make necessary adjustments to your pricing strategies for future jobs.
Step 3: The final total job cost
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, multiply your predetermined overhead rate by the estimated hours needed to complete the work. Remember, this will need to be adjusted again once you complete the work and have the actual hours worked.
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 these three figures, the formula for calculating total job cost is direct labor + direct materials + applied overhead. So, for our example, it's $540 + $300 + £150 = £990.
With this example, we can determine the cost to the job would be £990 once the work is complete. Remember, this is not the price you charge your customer but rather just what the job will cost you.
What are the advantages of integrating a job cost formula?
Integrating the total job cost formula into your pricing scheme means more stable business growth, more predictable cash flow, optimized pricing strategy and consistency across the business. Plus, it enables you to keep a better handle on your job profitability and ensure your company always stays in the black. You won't be surprised by material or labor cost changes and can keep better informed of natural price fluctuations.
How accurate is this formula?
The job-costing formula is always accurate — as long as the numbers you put into it are accurate. As Mr. Incredible said in The Incredibles 2, "Math is math". There's no fooling it. So, as long as your costs are on point, the formula will be, too. For a little help, check out these job costing tips for field service businesses.
When is the job costing formula required?
Honestly, you should always base your job estimates and prices on how much things cost you. So, ideally, the total job cost formula is always required. That said, it can become tedious, especially if math isn't your favorite and you're not using job management software for growth. But consistently costing jobs means your prices are more accurate and will lead to better business growth.
Job Costing Vs. Process Costing: The Differences
There is another type of cost accounting known as process costing. Process costing takes into account all 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 job and project 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, can be determined before the work is completed and is based on the number of units produced.
Job Costing Reports to Keep Track of Your Team
With the job costing formula under your belt, it's time to look at job costing reports and how they 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 job tracking. 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 (WIP) report. 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 and ensure proper cash flow.
3 job cost tips to track your field service team's performance
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 consistently. 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 job costing software, there will 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 your revenue generation is a huge step toward having a technology-based workflow. So, where does job costing fit in?
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. Most accounting software integrates with field service management software, killing two birds with one stone. So why not let them do the heavy lifting? It speeds up the time taken to calculate a job's cost and leaves 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.
Job and Process Costing Made Simple
To keep your business thriving and growing, it's crucial to have a clear understanding of 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 one. To streamline your whole cash flow, from estimates and pricing to proper job management and more, field service management software can help. So what are you waiting for? Get started now!