Job cost with overhead: 4 lines from a $931 example

To check job cost with overhead, add up materials, labor and overhead on a finished job, then compare the total with the bill. Most owners price a job before they do it. Far fewer check the job afterward, when the numbers are final and the answer is clear. That look-back is the most direct way to find out whether your price covered materials, labor and overhead, or whether the work quietly cost you money.

The check does not need a complicated system. It needs four lines: what the materials cost, what the labor cost, how much overhead was charged to the job, and the total of those three. Then you compare that total with what you billed. If the bill was higher, the job covered its costs. If the bill was lower, the job lost money, even if the customer was happy and the invoice looked fine.

• Write four lines for every finished job: materials, labor, overhead and total job cost.
• Check that the first three lines add up to the total before you compare it with the bill.
• Charge overhead with one written rate, applied to the job's direct labor dollars.
• Count materials from invoices, labor at its full hourly cost, and note any change from the estimate.
• If the bill is lower than the total job cost, the job lost money.

This post uses a worked example to show the four lines. The numbers come from a managerial accounting textbook, in a section on how to compute a predetermined overhead rate and apply overhead to production . That example is written for a manufacturer, not a service business, so treat it as a model of the arithmetic rather than a picture of your shop. The arithmetic carries over to a service business, as long as you apply it to your own job records.

The textbook follows one job, labeled MAC001. When it is complete, the job carries three cost pieces. The source puts it this way:

> When Job MAC001 is completed, overhead is $165, computed as $2.50 times the $66 of direct labor, with the total job cost of $931, which includes $700 for direct materials, $66 for direct labor, and $165 for manufacturing overhead.

Those are the four lines we will check:

1. Direct materials: $700
2. Direct labor: $66
3. Overhead applied: $165
4. Total job cost: $931

The first three lines add up to the fourth. Adding the $165 of overhead to the $700 of materials and the $66 of labor brings the total to $931. If your own job sheet does not add up this way, stop there and find the gap before you look at anything else. A missing line or a mistyped number is a good first thing to rule out, because it is easy to check and easy to fix.

Direct materials are the items that go into the finished work and can be traced to one job. In the example, that is $700. For a contractor, this often means lumber, fittings, wire, fasteners, paint, sealant, or parts bought for that customer.

The rule for this line is simple: add up what you actually paid for materials charged to the job, including delivery or freight charges tied to it. Leftover stock that went back on the shelf, or that will be used on a later job, should not sit in this total. If you keep a shared bin of common fasteners, you will need some habit for charging a fair share to each job, and that habit should be written down so you apply it the same way every time.

Materials are the easiest line to check, because invoices exist. Pull the invoices, match them to the job number, and confirm the total. Small purchases are the ones most likely to be missed, because a box of connectors or a single roll of tape is easy to forget when it is bought. Walk through the truck, the storage area and the card statements for the period. A single missed invoice can make a job look more profitable than it was.

Sales tax on materials is a separate question, and the rules differ by place and by type of business. Ask a local tax adviser how it applies to your work, and keep the records that show what you paid. The job cost sheet should show the materials cost you actually carried, so that the price comparison is honest.

Direct labor in the example is $66. The labor line is where owners most often go wrong, because the number on a timesheet is not the same as the full cost of the hours.

The Workiz blog, a guide for plumbing businesses, makes the point with a simple case: "For example, a $35 base hourly wage can easily cost your business $50 an hour out of pocket." That gap between the wage and the real cost comes from what the business pays and manages for each worker beyond the base pay. The exact gap depends on your payroll setup, your insurance, and how your state and local rules apply to your staff. Check your own numbers rather than copying a figure from someone else's shop.

For the look-back, start with the hours actually worked on the job. Multiply each person's hours by the true hourly cost you have worked out for that worker or crew, not the rate you quoted to the customer. If the job ran long because of a problem on site, the extra hours belong on this line, not in a hidden account. If a callback visit was made to fix the same job, its hours belong on the job too, because they were spent on that customer's work.

Labor also includes time that is paid but not billed in the usual way, such as travel between jobs or time spent loading the truck, when those hours are charged to the job by your method. Decide on a method, write it down, and use it for every job. Without a consistent method, two jobs of the same kind will show different costs for reasons that have nothing to do with the work.

Overhead is the cost of running the business that does not go directly to one job. It includes rent, insurance, office costs, phone and software, vehicle costs, shop supplies, and tools that wear out. It also includes the owner's time spent on work that does not get billed, such as bookkeeping, estimating, and answering the phone. In the example, the overhead charged to job MAC001 is $165.

Actual overhead is not known until a period is over, so it cannot be charged to a job as the work happens. The textbook assigns overhead to each job through a predetermined rate. The source states it directly: overhead is allocated to the individual jobs at a predetermined rate of $2.50 for each direct labor dollar, applied when the jobs are complete.

So the rate in the example is $2.50 for every dollar of direct labor. The job had $66 of labor, and $2.50 times $66 is $165. The source makes the same point with its own wording: "If the total labor paid for the job is $66, the overhead applied to the job is $2.50 times that amount, or $165."

Why use a rate instead of the actual cost? Because actual overhead is not known until a period ends, and it does not spread evenly across jobs. An owner needs a figure while the job is still open, so that a quote or a decision can be made with it. A rate set ahead of time gives that figure.

In the textbook, the base is direct labor dollars. Some shops use labor hours or machine hours instead. The choice matters less than sticking with one base and applying it the same way to every job. The textbook's overview of this method is worth reading in full if you want to see the whole process laid out step by step. For more on setting an overhead rate, see overhead per hour inputs to set before a job price .

Fixed costs do not change with the amount of work, so the overhead charged to each job depends on how much work shares those costs. The textbook shows this with units: 500 units in one month and 2,000 the next change the cost of each unit from $2 to $0.50. The total overhead did not change in that example. The number of units did, and that moved the cost of each unit a great deal.

A shop lease, a truck payment and an insurance premium do not drop when work slows down. In a slow month, the actual overhead cost of each job rises, because those costs are shared by less work. The overhead applied under a predetermined rate still follows labor dollars, so the gap between actual and applied overhead is what the rate-setting review must catch. That is why one job can show an overhead figure that looks high or low even when nothing about that job went wrong.

For this reason, the look-back should not rely only on the rate you set when you first started using it. The textbook compares several things for one company: "For example, Figure 4.18 shows the monthly costs, the annual actual cost, and the estimated overhead for Dinosaur Vinyl for the year." That is the comparison an owner should make too. Look at what overhead actually cost over the period, compare it with the estimate used to set the rate, and adjust the rate if the gap is large and keeps repeating.

The total job cost is the sum of the first three lines. In the example, it is $931. The check itself is one comparison. Take the amount you billed for the job, subtract the total job cost, and look at what is left.

Suppose the bill for job MAC001 came in higher than the $931 total cost. The difference is what the job kept above its costs, and it shows that the job covered its materials, its labor and its overhead. Now suppose the bill came in lower than $931. The job would then fall short of its full cost, even though the materials were bought, the crew was paid and the work was done well.

The result tells you something specific. A positive difference means the price covered the costs charged to the job. A negative difference means it did not. It can help to express the leftover as a share of the bill as well, which makes one job easy to compare with another even when the bills are different sizes. Neither result proves the business made a good year, because the check only covers the costs that were assigned to this job. Other costs that were not assigned still have to be paid from somewhere. Still, a job that does not cover its own costs is a warning sign that deserves a careful look before the next quote goes out.

Write the answer on the sheet, in plain numbers, with the date and the job name. Then keep the sheet with the invoice. Over time, the record shows which kinds of work pay well and which ones consistently come up short.

Small errors add up. The Workiz guide puts the risk plainly: "With prices shifting so quickly, a tiny 5% estimating error on a $10,000 installation instantly wipes out $500 of your profit." A small percentage error on a large job can take a large bite out of the margin, which is why the estimate on big jobs deserves the most attention.

In practice, a missed price often comes from one of a few places:

• Materials were bought but never charged to the job, or a delivery fee was left off.
• Labor was priced at the base wage instead of the full cost of the worker's hours.
• Overhead was left out entirely, so the job looked cheaper than it was.
• The job changed during the work. Extra materials and extra hours were added, but the price was not updated to match.
• A callback or warranty visit was done for free and never recorded against the original job.

The last two are worth special attention, because they are easy to miss on a busy schedule. A change to the scope of work should trigger a change to the price, and the change should be written down before the crew starts. If that did not happen, the look-back will show a gap, and the record will help you decide what to do next time. For the expenses that belong in a quote, see service call expenses to add before you quote .

Use the same steps for every job, so the numbers can be compared from one job to the next:

1. Pull the material invoices for the job number, and add them up. Include delivery and freight charges tied to the job.
2. Add the hours worked by each person on the job, and multiply by the full hourly cost you use for that worker.
3. Apply your overhead rate to the labor total. Write the result on the sheet, next to the labor line.
4. Add the three lines to get the total job cost, and compare it with the amount billed.
5. If the job came in differently from the estimate, write one sentence about why. This is the step that improves future quotes.

The fifth step takes a minute, and it is the one that is easiest to skip. A short note such as "customer added two outlets after the quote" or "old wiring needed replacing" tells you far more than the numbers alone. Over a year, those notes show patterns that a total cannot show.

Four lines are enough for most jobs. Keep them on the same sheet for every job, use the same definitions each time, and do not change the method halfway through the year without writing down why. A consistent method is more useful than a precise one, because it lets you compare jobs with each other and with your estimates.

The point of the look-back is not to find fault. It is to make the next estimate better than the last one. Four lines, checked after each job, will tell you whether your prices covered the costs assigned to each job.

Start with the job you finished most recently. Pull the invoices, count the hours, apply the rate, and compare the total with the bill. Then do the same for the next job. After a few weeks of this, the arithmetic becomes routine, and the real value shows up in the notes: which jobs held their price, which ones needed more labor than expected, and which materials were underpriced in the quote.

Related guides: Auto repair invoices: 7 checks before you bill a job · Check 9 job site material storage limits .

Do I need special software for this check?

No. The check needs four lines on a sheet: materials, labor, overhead and the total job cost.

What does it mean if the bill is lower than the job cost?

The job lost money, because the price did not cover the costs charged to it.

Does the textbook example apply to a service business?

The example is written for a manufacturer, but the arithmetic carries over to a service business when you apply it to your own job records.