Calculate Labor Costs

Calculate how much it costs your business to employ all staff members who will work on the project per day. Multiply the payroll day rate by the

amount of time you estimate you’ll need to complete the job. If you’ll rely on subcontractors for work your company doesn’t complete itself, factor

those costs into your total labor costs for the job. It can help to get an estimate from each of these contractors.

Calculate Material Costs

Calculate the cost of all materials used on the job. For a construction business, this would include materials such as lumber, wiring, screws and more.

You may choose to add a margin to these materials to cover other related costs including wastage or delivery fees.

Estimate Applied Overhead

Overhead is the most difficult cost to calculate, because you’ll need to rely on an approximation instead of a more exact figure. You’ll need to estimate

the total overhead costs factoring into the job, including rent on your office, administrative costs and depreciation on the equipment used. Many

businesses apply a blanket overhead fee to each project, such as 10 percent per job. An accountant can help you analyze your business and develop a

specific approach to overhead. Or, you can calculate your predetermined overhead rate.

Written as an equation, job costing is calculated like this:

Total Job Cost = Direct Materials + Direct Labor + Applied Overhead

What Is a Predetermined Overhead Rate?

The predetermined overhead rate is a calculation used to determine the estimated overhead costs for individual jobs, during a specific time period.

Most businesses create annual budgets that include estimated overhead and estimated activity for the year. You can use these budget estimates to

calculate an overhead rate to apply to each of your jobs.

To calculate your predetermined overhead rate, you use the following equation:

Predetermined Overhead Rate = Estimated Overhead / Estimated Activity

There are usually different activity estimates included in your budget; opt to use the activity that applies most directly to your company’s overhead costs,

for example, your estimated direct labor hours.

Predetermined Overhead Rate Example

You want to use job costing in your construction business, and you’re looking to calculate your predetermined overhead rate to use for job costing. You

estimate that in 2022, you’ll have $500,000.00 in overhead costs. You also estimate that your employees will work 10,000 hours in 2022.

Your calculation would look like this:

500,000 overhead / 10,000 direct labor hours = $50 per direct labor hour

Now that you’ve calculated your predetermined overhead rate, you can apply it to jobs for the purpose of job costing, as the applied overhead cost. For

each direct labor hour worked, you’ll add $50 of overhead to the job. This is your applied overhead.

To calculate job costing, you’ll remember we use the following calculation:

Total Job Cost = Direct Materials + Direct Labor + Applied Overhead