Your manufacturing business may be busy, with orders coming in and sales looking healthy, but do you know which jobs are actually making you money?
It is easy to assume that a well-priced job will deliver the profit you expected. But the final result can be very different once the work is completed.
Job costing helps you look beyond the selling price and understand what is really happening with the work you take on. In this article, we look at how to see the profitability of individual manufacturing jobs and understand why some jobs may deliver less profit than expected.
Key Takeaways
- Job costing shows the true cost of each manufacturing job, including materials, labour, machine time, waste, rework and production overheads.
- A job can be less profitable than expected even when it generates strong sales, particularly when actual costs are higher than those used in the original quotation.
- Comparing expected and actual job costs helps manufacturers identify which jobs are genuinely profitable and spot recurring issues affecting margins.
- Job costing gives you useful evidence for future quoting, helping you refine your estimates when certain jobs consistently use more labour, materials, machine time or production capacity than expected.
What Is Job Costing in Manufacturing?
Job costing is a way of tracking the costs attached to an individual piece of work, such as the materials used, labour required and relevant production overheads.
You then compare the total cost of the job with what you charged the customer to see how much profit the job actually generated and whether it delivered the profit you expected.
How Does Job Costing Help Manufacturers Calculate Profit?
A busy workshop can give you the impression that your manufacturing business is doing well. However, the number of orders you have does not tell you how much profit each job is actually generating.
As a manufacturing business, job costing helps you:
See the Full Cost of a Job
Instead of looking at the material invoice or the hours worked in isolation, job costing brings the relevant costs together. This can include materials, direct labour, production overheads, waste and rework, and other costs directly linked to the job.
Calculate the Profit from Each Job
Once you know the total cost, you can compare it with what you charged the customer.
For example, if a job brings in £10,000 and costs £7,500 to produce, the job has generated £2,500 profit. That gives you a 25% profit margin.
Understand What is Affecting Your Margin
If the margin is lower than expected, you can examine whether the job used more materials, took more labour hours, generated more waste or required additional work to complete.
Compare the Result With What You Expected
Job costing helps you compare the actual cost and profit with the figures you used when quoting the job. With this, you can see whether your original costing reflected what the work actually required.
Generally, job costing gives you more than a total for what you spent. It connects the revenue from an individual job with the costs of producing it, so you can see the profit that job actually generated.
What Affects the Profitability of a Manufacturing Job?
A manufacturing job does not become less profitable only because you sell it for less than expected. The problem can also be because of:
Material Costs and Wastage
The amount you expected to spend when you prepared the quotation may not be the amount you actually spend during production. Material prices can change, but so can the quantity you use.
Also, waste, damaged materials, excessive offcuts and changes to the customer’s specification can all increase the cost of a job.
As a result, more of the selling price is used to cover materials and less is left as profit.
Labour Hours
Materials are only part of the calculation. The hours your team spends producing the job can have just as much impact.
Suppose your quotation assumes that an order will take 80 production hours. If the team eventually spends 110 hours on it, you have used another 30 hours of labour capacity. That extra time automatically increases your labour cost.
If the customer still pays the original £10,000 and there is no way to charge for those additional hours, the extra labour reduces what you actually made from the job.
Rework and Remakes
Rework and remakes can have a significant effect on the profitability of a manufacturing job. When something has to be corrected or produced again, you are carrying out additional work without necessarily being able to charge the customer for it.
You may need additional materials, labour and machine time, as well as another machine set-up, quality check or delivery. These extra costs increase the cost of completing the job and reduce the profit available from it.
Therefore, rework is important to track because these costs can be easy to overlook. Extra labour, materials and machine time can simply become part of your normal production costs, making it harder to see why a job delivered less profit than expected.
Set-Up and Machine Time
If a job takes longer to set up and produce, it will use more of your production time, increasing the cost of completing it.
This can happen when a job requires repeated machine adjustments, tooling changes, testing or lengthy preparation before production can begin.
As a result, a job that takes considerably more machine time than expected can cost more to produce than you allowed for when quoting. If the customer still pays the agreed price, those additional costs come directly out of the profit you expected to make.
Production Overheads
There are certain production costs that cannot be traced directly to one particular job.
Your factory, machinery and production operation all have running costs. Buildings and equipment need maintenance, machinery loses value over time, and production management and other indirect production labour still have to be paid for.
When assessing the true cost of manufacturing each job, these costs need to be reflected. Otherwise, you may calculate a healthy profit based only on materials and direct labour while overlooking the production costs that your work also needs to cover.
However, you should not simply split these costs equally across every job. They should be allocated based on how much each job uses your production resources.
Also Read
- Why Small Businesses Have Cash Flow Problems
- Why Is Cash Flow Important?
- How to Get Your Business Financially Ready for Growth?
How Can You Identify Your Most Profitable Jobs?
Once you know what each job actually cost and the profit it generated, you can start comparing the work you take on.
Doing this can reveal something your overall sales figures cannot.
Calculate the Full Cost of Each Job
You need more than the material invoice and the hours worked to understand what a job really costs.
Your costing should capture the relevant materials, labour, machine time and production overheads, along with costs such as scrap, rework and other job-specific production activity.
Overheads should also be allocated in a way that reflects how the job uses your production resources rather than simply applying the same amount to every job.
Without these costs, a job can appear profitable because some of the resources used to produce it have not been attributed to it.
Look for Consistent Patterns Across Jobs
Looking at individual jobs can tell you how one order performed, but comparing several similar jobs can reveal much more.
Group completed work by factors such as customer, product type, order size, batch size or complexity.
When you do this, you may find that certain types of work consistently produce stronger margins, while others require more labour, rework, material or production time for the profit they generate.
These patterns make it easier to distinguish between a one-off result and a recurring difference in profitability.
Check How Setup and Batch Size Affect Profit
The size of a production run can affect how profitable a job is. Setup and tooling costs are spread across the units produced, so a small batch can carry a higher cost per unit than a larger one.
By looking at the setup time, production time and batch size for each job, you can see whether certain jobs are costing more to produce than others.
This helps you identify which jobs are giving you the best profit after taking the time and resources needed to produce them into account.
Want to see what a job is really costing you?
Use our Light Manufacturing Profit Margin Calculator to work out your total production cost.
👉 Light Manufacturing Profit Margin Calculator
Manufacturing More Must Mean Making More
Job costing as a manufacturer allows you to see which work is profitable, which jobs are reducing your margins and what is affecting the return on each job. It is what turns having a busy workshop into knowing whether your growth is actually paying off.
If you want to know which of your manufacturing jobs are genuinely profitable, Surrey Accountancy can help. Tiba Al-Khalidy, our trained accountant and founder, works with manufacturers to understand the real costs behind their jobs, identify where profit is being made and where margins are being lost.
Not sure which of your jobs are actually making you money? Book a complimentary discovery call with Tiba.
Frequently Asked Questions
How Do I Calculate Job Costing?
To calculate job costing, add the direct materials, direct labour and an appropriate share of manufacturing overhead assigned to the individual job. You can then compare the total job cost with the selling price to determine the profit and profit margin generated by that job.
How to Do Costing in a Manufacturing Company?
Start by identifying the costs involved in producing your goods, including direct materials, direct labour and manufacturing overheads. For businesses producing distinct or bespoke orders, job costing assigns these costs to individual jobs so you can see the actual cost and profitability of each one.
What Are the Three Main Types of Manufacturing Costs?
The three main manufacturing costs are direct materials, direct labour and manufacturing overhead. These costs represent the resources used to manufacture a product and form the main components of job costing.
What is Another Name for Job Costing?
Another name for job costing is job order costing or job-order costing.
What are the Four Types of Costing?
The four primary types of costing are standard costing, activity-based costing, marginal costing and absorption costing. Each method approaches the measurement and allocation of costs differently.
