Part of The manufacturing guide
What does each job really cost you? Job costing for manufacturers
Most shops know what they quoted. Fewer know what the job actually cost once materials, burdened labour and shop overhead are counted. Here's how to work it out, and how the wrong overhead method can make your best product look like your worst.
Key takeaways
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- Compare actual against quoted on every job, while it's still fresh
- If machines drive your overhead, allocate overhead by machine hours as well as labour hours
Ask a shop owner what a job cost and you'll often hear what it was quoted at. The real cost (steel that went up mid-job, hours nobody wrote down, the share of rent and power the job used) only shows up at year-end as a margin that's thinner than expected.
Job costing closes that gap. This article is part of our guide to the financial side of running a manufacturing business.
The three pieces of every job's cost
1. Materials
Every material, part and outside service that goes into the job: steel, fasteners, paint, powder coating sent out, freight in. The key is coding each purchase to a job when the bill is entered, not guessing later.
2. Burdened labour
A welder paid $34 an hour costs you more than $34 an hour. Add:
- Employer CPP and EI
- Vacation pay and general holiday pay
- WCB premiums
- Benefits, if you offer them
For many Alberta shops that adds 15% to 25%. At 18%, that $34 welder is a $40-an-hour cost. If you quote at $34, you're losing $6 on every hour before the job even starts.
3. Overhead
Everything that keeps the shop running but isn't tied to one job: rent, power, equipment leases, insurance, supervisors, the office, shop supplies and maintenance.
Turn overhead into a rate. A simple version: total overhead for the year divided by total direct labour hours.
Example: $1.2 million of overhead ÷ 30,000 direct labour hours = $40 of overhead per labour hour.
Every hour on the shop floor then carries $40 of labour cost and $40 of overhead.
Example: one job, quoted vs actual
A 22-person fabrication shop in Acheson quotes Job 2417, a skid package, at $48,000.
| Quoted | Actual | |
|---|---|---|
| Materials | $17,500 | $19,800 (steel price increase) |
| Labour hours | 160 | 212 (rework on two welds) |
| Burdened labour ($40/h) | $6,400 | $8,480 |
| Overhead ($40/h) | $6,400 | $8,480 |
| Total cost | $30,300 | $36,760 |
| Margin | $17,700 (37%) | $11,240 (23%) |
The job still made money, but $6,460 less than planned. Without job costing, that disappears into the year's totals. With it, you can see two specific causes: material pricing that wasn't locked in, and rework. And you can fix both on the next quote.
When labour hours aren't the right driver
Allocating all overhead by labour hours works when labour is what drives your costs. In shops with expensive machines (CNC plasma, laser, press brake, robotic welding) much of the overhead comes from the machines, not the people.
Example: two product lines, two answers
The same shop makes two product lines:
- Plasma-cut brackets: 0.2 labour hours and 0.15 CNC machine hours each, $9 of steel, selling at $34
- Hand-welded frames: 1 labour hour and no machine time, $20 of steel, selling at $110
Using one rate ($40 overhead per labour hour):
| Bracket | Frame | |
|---|---|---|
| Materials | $9.00 | $20.00 |
| Labour ($40/h) | $8.00 | $40.00 |
| Overhead | $8.00 | $40.00 |
| Cost | $25.00 | $100.00 |
| Margin | 26% | 9% |
The brackets look like the winner. Now split overhead into its two real drivers: $480,000 of machine costs (the CNC lease, power, maintenance) over 6,000 machine hours = $80 per machine hour, and the remaining $720,000 over 30,000 labour hours = $24 per labour hour:
| Bracket | Frame | |
|---|---|---|
| Materials | $9.00 | $20.00 |
| Labour ($40/h) | $8.00 | $40.00 |
| Overhead | $4.80 + $12.00 = $16.80 | $24.00 |
| Cost | $33.80 | $84.00 |
| Margin | under 1% | 24% |
The answer flips. The shop had been chasing bracket orders and discounting frames. That's exactly backwards.
Markup isn't margin
A common quoting trap: adding 30% to cost and calling it a 30% margin.
- Markup is profit as a percentage of cost: cost $100, sell $130, markup 30%.
- Margin is profit as a percentage of the selling price: $30 ÷ $130 = 23%.
If your target is a 30% margin, the price is cost ÷ 0.70: $100 ÷ 0.70 = $142.86.
Setting it up in your books
You don't need an expensive system to start:
- Job numbers on everything: purchase orders, supplier bills, timesheets. QuickBooks Online can track this with projects, classes or customer:job.
- Time tracking by job: a simple tablet timesheet at each station beats end-of-week guesses.
- Recalculate overhead rates at least yearly, and when something big changes, such as a new machine, a bigger building or another shift.
- Close out each job: quoted vs actual, reviewed within a week of completion.
Job costing also makes your month-end close and your inventory and work-in-progress numbers far more reliable.
The bottom line
Quoting from real costs is the fastest way to raise a shop's margin without raising its workload. If you'd like job costing set up in your books and a quoted-vs-actual report every month, see how we help manufacturers.
Sources
This article is general information, not advice for your situation. Rules and rates change, so talk to us before acting on it.