How to do job costing

A profit and loss statement shows how the whole business did. Job costing breaks that down to each piece of work. It suits businesses that do distinct jobs for customers, such as trades, repairs, printing, events or custom manufacturing.

business.gov.au says getting prices right starts with knowing what it costs to produce your goods or services, and suggests focusing on your most profitable customers, products or services. One pricing method it describes is to calculate the total cost of making and supplying something, including materials, labour and overheads, and then add a mark-up or margin. Job costing gives you that total cost from your own records rather than a guess.

A direct cost can be traced to one job: the materials used on it, the hours worked on it, a subcontractor engaged for it, equipment hired for it. An overhead is a cost of running the business that can't be traced to any single job, such as rent, insurance, office wages, phones and accounting software.

• Materials: put the job number on purchase orders and supplier bills, and record materials taken from stock against the job they were used on.
• Labour: record hours by job on every timesheet. Multiply them by an hourly cost for each person that covers their wages and other employment costs, not their charge-out rate.
• Subcontractors and hire: enter each bill against the job it relates to.
• Travel and small purchases: note the job number on each receipt.

Costs that reach the books without a job number aren't counted against any job, which makes jobs look less costly than they were. A weekly check for direct costs with no job against them keeps the figures honest.

Overheads are shared out using a base that tracks how much of the business's capacity each job uses. Productive labour hours, the hours spent working on jobs, are a common choice. Take the overheads for a period from the profit and loss statement, and divide them by the productive labour hours recorded on timesheets for the same period. The divisor must be more than zero, so use a period long enough to include real work.

Recalculate the rate each quarter or year, because both overheads and hours change. business.gov.au also describes a pricing method that works out all business costs as an hourly rate. A labour cost per hour plus an overhead rate per hour is one way to build that figure from your books.

The last line is what the job contributed after its direct costs and its share of overheads. A job that covers its direct costs but not its overhead share still helps pay the rent, but it doesn't earn its keep at the current price.

Here the work took more hours than quoted and the materials cost more than estimated. Look for the reason behind each difference: hours underestimated, a price rise from a supplier, or work done outside the quote that should have been a variation. Recording extra work as an agreed variation while the job is under way keeps it from going unpriced.

• Update your quoting rates for labour and materials when the same differences keep appearing.
• Group finished jobs by type or by customer to see which kinds of work earn the most after all costs.
• Compare the direct costs on all job cost sheets for a month with the direct cost accounts in the books. A gap can point to costs never tagged to a job, though labour costed at an hourly rate and stock drawn from earlier purchases also cause differences.
• Feed the overhead rate into new quotes, so every price covers a share of running the business.

business.gov.au's quoting advice is to price for profit, counting every cost and adding a fair margin. Job costing is how you find out what all the costs were.