Job Costing for Manufacturing: How to Calculate and Track Costs for Each Production Run
Job costing is an essential element of manufacturing businesses that helps to identify the cost of production for each product or service they offer. It is a process of tracking and calculating the costs associated with a specific production run or project, which includes all the direct and indirect expenses incurred during the manufacturing process.
How to Calculate and Track Costs
Job costing involves dividing the manufacturing process into smaller and manageable units called jobs or production runs.
Step 1 – Identify Direct and Indirect Costs
The first step in job costing is to identify the direct costs associated with each job, including raw materials, labor, and manufacturing overhead. Raw materials are the materials used in the manufacturing process, such as steel, plastic, and chemicals. Labor includes the wages and salaries paid to the employees involved in the manufacturing process, including assembly line workers, supervisors, and managers. Manufacturing overheads are the indirect costs incurred during the manufacturing process, such as utilities, rent, and equipment depreciation.
Step 2 – Allocate Indirect Costs & Overhead
Once you have identified the direct costs associated with each job, the next step is to allocate the indirect costs or manufacturing overheads to each job. This is done by using a predetermined overhead rate, which is calculated by dividing the total manufacturing overhead costs by the total direct labor hours or machine hours.
For example, if the total manufacturing overhead costs for a particular month are $50,000, and the total direct labor hours for the same month are 5,000 hours, the predetermined overhead rate will be $10 per direct labor hour. If a particular job takes 20 direct labor hours to complete, the overhead cost allocated to that job will be $200 ($10 per hour x 20 hours).
Step 3 – Calculate Total Costs
The next step is to calculate the total cost of each job by adding the direct costs and allocated manufacturing overheads. This will give you an accurate idea of the cost of each production run and help you to determine the selling price of the product or service.
Step 4 – Job Cost Reports
“Tracking the costs of each job is also important to ensure that the manufacturing process is running efficiently and to identify any areas where costs can be reduced,” commented Jenny Smith, CPA, CFE and MHCS Director. “This can be done by using job cost reports, which provide a detailed breakdown of the costs associated with each job.”
Job cost reports should include the job number, description, direct costs, manufacturing overheads, total cost, and any additional information related to the job, such as the number of units produced, the time taken to complete the job, and any issues or challenges encountered during the manufacturing process.
Regularly reviewing job cost reports can help you to identify any areas where costs can be reduced, such as using cheaper raw materials or improving the manufacturing process to reduce labor costs. It can also help you to make informed decisions about pricing and product development, as you will have a better understanding of the costs associated with each job.
Job costing is an essential element of manufacturing businesses that helps to identify the cost of production for each product or service they offer. By using job costing, you can ensure that your manufacturing process is running efficiently and that you are offering your products and services at a profitable price.
Need Help?
Making an effort to save money on material costs is a win-win for manufacturers. If you’re looking for ways to save on costs, reach out to us. We’ve been helping Iowa manufacturers and distributors for more than 7 decades and would love to help you too.