# How To Calculate a Job Cost Formula

To calculate direct labor costs, identify how much it costs you per hour in labor and multiply that rate by how many hours were worked. For example, if a job takes 20 hours for an employee paid \$17 per hour to complete, then the direct labor cost for that job is \$17 x 20, or \$340.

## When to use the job cost formula

Professionals use a job cost sheet to record information as a job progresses, but they compute the total job cost at the end of the job. On a job cost sheet, they track:

The job cost formula can be used by the expert to give a client an estimated total cost for their services if it is possible to estimate the number of direct labor hours and direct material costs. The job cost sheet is used by the professional or their designated biller to create a finalized invoice that is sent to the client after the service is completed.

## What is a job cost formula?

A job cost formula, also referred to as “job costing,” is the method used by experts to calculate the total cost of a job. The customer typically covers all of these expenses as well as any additional expenses needed for the job to be profitable. As a result, accurate cost tracking for each job yields maximum profits.

Companies and people who produce customized products use the job cost formula Craftspeople and independent contractors may use the job cost formula as it is ideal for small-scale production.

## How to use the job cost formula

The steps you’ll take to determine a job’s total cost are listed below:

### 1. Calculate the predetermined overhead rate

To determine a final job cost using job costing, you must predetermine a number of numbers, including your overhead rate. You keep track of other numbers as you go, such as direct labor and direct materials.

Your organization’s estimated overhead and estimated activity are the two numbers that you probably calculated at the beginning of the year to determine your predetermined overhead rate. The majority of businesses base these figures on their estimated overhead (how much they expect to spend on materials and other costs) and their estimated activity (how many hours they expect employees to work). Find your predetermined overhead rate by using this formula:

This calculation will give you a sum in dollars and cents. When determining the applicable overhead rate in step three, this dollar and cent amount returns.

### 2. Determine direct materials and direct labor costs

Determine your labor costs per hour and multiply that amount by the number of hours worked to arrive at direct labor costs. For instance, if an employee is paid \$17 per hour and a task takes 20 hours to complete, the direct labor cost for that task is \$17 x 20, or \$340.

Your project’s direct materials costs are the price of the materials you used to finish it. The project’s direct materials cost is \$547 if you or an employee uses \$547 in materials to finish it.

It’s crucial to track the actual hours and materials as the project develops, even if you estimate the costs of direct labor and direct materials at the beginning. The estimate might not match reality because some things might need more time or materials to meet the exact requirements of the customer when making custom products. Alternatively, you might finish the job sooner or with fewer materials than anticipated; in this case, you should provide the client with an accurate invoice to uphold your good name.

### 3. Find the applied overhead rate

The applied overhead rate pays for the project’s manufacturing overhead costs to prevent your business from suffering a net loss. You use that number in the direct labor calculation; it is not the hourly rate that you pay yourself or your staff.

Count the hours you or your staff spent on the project to determine the jobs applied overhead rate. Due to this, experts determine a jobs applied overhead rate at the conclusion of a project. Multiply the dollar amount from step one by the number of direct labor hours to arrive at this figure.

### 4. Calculate total costs and profit

At this point, your job cost formula looks like this:

Direct materials plus direct labor and applied overhead equal the total job cost.

You can calculate the total cost of the project by using the numbers from steps one through three. However, this formula does always not account for profit. When creating a customer invoice, you may add a unit cost, product cost, or base fee on top of the total job costs depending on your business model and the number of employees you have. When a customer contracts you for work, they should understand these unit costs, product costs, or base fees.

## Example of applying the job cost formula

Jared owns his own woodworking business called Woodworks Inc. , of which he is the sole employee. Jared is hired by Marissa to create a unique dining table for her new house. Here’s how Jared determines the job cost for Marissa’s table using the above steps:

Since this is Jared’s first order of the year, his first task is to determine Woodworks’ predetermined overhead rate because he hasn’t done so yet. Jared has calculated that Woodworks’ predetermined overhead rate for the coming year will be \$16 with an estimated overhead of \$35,000 and an activity estimate of 2,100 hours. 67 per hour of direct labor.

Jared then keeps track of his labor costs and the cost of the supplies he uses to fulfill Marissa’s order. He spends 22 hours on the project and spends \$400 on metal, wood, and other supplies. The jobs’ direct labor cost is \$660 because Jared is paid \$30 per hour: 22 x 30 = 660.

Jared multiplies 22 x \$16. 67 to determine the project’s actual overhead rate, which comes out to \$366. 74.

Jared adds \$400, \$660, and \$366 to the total job cost using the formula Total job cost = Direct materials + Direct labor + Applied overhead. 74 to arrive at a total job cost of \$1,426. 74. For her dining room table, Marissa gives Jared this amount.

## FAQ

What is meant by job cost?

Written as an equation, job costing is calculated like this:
1. Direct materials, direct labor, and applied overhead make up the total job cost.
3. Direct materials, direct labor, and applied overhead make up the total job cost.

How do you calculate profit in job costing?

A costing technique called job costing is used to estimate the cost of particular jobs that are carried out in accordance with the customer’s requirements. It is a fundamental costing technique that can be used when the work consists of various projects or contract jobs.

What are the examples of job costing?

To determine a profit margin, first determine the gross profit by subtracting the direct costs of production, such as the materials and labor used to make the product, from the income a product generates in sales revenue. The result is the gross margin.