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Job costing tracks the cost of each individual job, project or order — materials, labor and overhead — so you know which ones make money. The definition, job costing vs process costing, the formula and overhead rate, a worked example, and how to track actual against estimate.
Short answer: job costing (or job order costing) is a way of tracking costs per individual job — a custom order, a construction project, a service contract, a batch — rather than across all production. Every job accumulates its own direct materials, direct labor and a share of overhead, so at the end you know exactly what that job cost and whether it made money. It's the costing method for businesses where each piece of work is different: contractors, custom manufacturers, engineering firms, print shops, repair and service companies.
Next step: try the job cost calculator below with one of your own jobs. Contractors: see construction job costing in Business Central.
Job costing vs process costing
| Job costing | Process costing | |
|---|---|---|
| Used when | Each job is different | Identical units in continuous production |
| Costs tracked | Per job | Per process or department |
| Examples | Construction, custom manufacturing, consulting | Chemicals, food processing, bottling |
| Question it answers | "Did this job make money?" | "What does one unit cost?" |
Many manufacturers use both: process costing for standard lines, job costing for custom orders.
The formula
Job cost = Direct materials + Direct labor + Applied overhead
Applied overhead = Overhead rate × Allocation base (e.g. labor hours or machine hours)
Overhead rate = Estimated annual overhead ÷ Estimated annual allocation base
Job margin = Job revenue − Job cost
Worked example
A custom fabrication shop estimates $480,000 of annual overhead over 12,000 direct labor hours:
Overhead rate = 480,000 ÷ 12,000 = $40 per labor hour
Job #1047, a custom steel frame, quoted at $9,500:
| Cost | Estimate | Actual |
|---|---|---|
| Direct materials | $3,200 | $3,520 |
| Direct labor (hours × $32) | 60 h → $1,920 | 71 h → $2,272 |
| Applied overhead (hours × $40) | 60 h → $2,400 | 71 h → $2,840 |
| Job cost | $7,520 | $8,632 |
| Margin on $9,500 | $1,980 (20.8%) | $868 (9.1%) |
The job still made money — but less than half the planned margin. The split shows where: materials 10% over (price or waste) and labor 18% over (setup time not in the estimate). That's the information that fixes the next quote. Why jobs come in over estimate.
What makes job costing accurate
- Materials issued against the job — not taken from a general bin and "allocated later".
- Time recorded per job and task, daily — not reconstructed on Friday from memory.
- Overhead rate reviewed yearly — a rate set five years ago misprices every job.
- Budget per phase, not just per job — "the job is 15% over" leads nowhere; "welding is 40% over" leads to a fix.
- Committed costs visible — open purchase orders against the job, so overruns show up before the invoice.
Job costing in an ERP
In Business Central, jobs (projects) carry a budget per task, and purchases, time sheets and material issues post directly against the job and task. You see budget, committed, actual and remaining in one place, plus work in progress (WIP) and percentage-of-completion revenue. Manufacturers can use production orders with routings for the same analysis at operation level. For contractors with retainage and progress billing, see what's native and what needs an app.
FAQ
What is job costing? Job costing is a cost-accounting method that tracks materials, labor and a share of overhead for each individual job, such as a custom order, a construction project or a batch, so you know what each one cost and whether it made money.
Who uses job costing? Contractors, custom manufacturers, engineering and professional services, repair shops, agencies — anyone whose work is unique per order.
What is WIP in job costing? Work in progress: costs accumulated on jobs not yet finished and invoiced. It's an asset on the balance sheet until the job completes.
Should overhead be allocated by labor hours or machine hours? Whichever drives your overhead. Labor-intensive shops use labor hours; automated ones use machine hours.
How is job costing different from project accounting? Largely the same idea; project accounting usually adds billing, milestones and revenue recognition.
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