Job costing is the process of tracking and accumulating all costs associated with a specific project or job — including direct labor, direct materials, and allocated overhead — to determine the true cost and profitability of that individual project.

Why is job costing important for freelancers?

Job costing reveals which projects are actually profitable and which are losing money. Without job costing, you know your total revenue but not whether each project contributed to your profit. Knowing actual costs per project enables better pricing, identifies scope creep, and helps decide which types of work to pursue.

What's the difference between job costing and process costing?

Job costing assigns costs to individual units or projects — used by businesses doing custom or discrete work (like freelancers). Process costing assigns costs to processes or departments over time — used by businesses producing homogeneous products (like manufacturers). Job costing is right for you; process costing is for factories.

How do I set up job costing for my freelance business?

Set up your accounting software with job or project-level tracking: create a project for each client engagement, tag all direct costs (subcontractors, specific expenses) to the project, track time by project if your software supports it, and run project profitability reports at project close.

What is a job cost sheet?

A job cost sheet is a document — physical or digital — that tracks all costs assigned to a specific job. It typically includes: job number, client name, description, estimated costs, actual direct labor costs, actual direct material costs, allocated overhead, and total cost vs. revenue to show profitability.

Accounting

What is Job Costing?

Job costing is the process of tracking all costs — labor, materials, and overhead — associated with a specific project or job.

What Is Job Costing?

Job costing is an accounting method that tracks every cost — direct labor, direct materials, and allocated overhead — associated with a specific project or "job." The goal is to determine the true cost and profitability of each individual project, rather than just knowing your business's total profit. For freelancers, job costing means tracking: how much did this specific project actually cost me to deliver, and did I make money on it? The Pricing Feedback Loop: Job costing creates a feedback loop: you estimate a project, execute it, track actual costs, and compare actual profitability to estimates. This feedback makes future estimates more accurate — and accurate estimates are the foundation of profitable fixed price work.

The Three Components of Job Costing

1. Direct Labor Your time — or your employees' time — spent specifically on this project. To track this accurately: - Use time tracking software (Toggl, Harvest, Everhour) - Log time to specific projects or jobs - Apply your effective labor cost rate (what your time actually costs you, including taxes and benefits) 2. Direct Materials / Direct Costs The expenses that can be specifically traced to this project: - Subcontractor fees - Project-specific software licenses - Stock photography or assets - Travel specifically for this client - Printing or production costs 3. Allocated Overhead A proportional share of your indirect/business overhead costs applied to each project: - Based on a pre-determined overhead rate (e.g., 30% of direct labor) - Or based on hours worked, square footage, or another allocation base - This ensures every project "pays its rent" for using shared business resources

Job Costing: Step by Step

Step 1: Create a Job Record In your accounting software, create a project or job record for each client engagement. Include: - Client name - Project description - Estimated budget - Start and expected end date Step 2: Estimate Costs Before starting, estimate: - Expected direct labor hours × labor rate - Expected direct costs - Overhead allocation - Target profit margin This becomes your job estimate/budget. Step 3: Track Actual Costs During the Project As work progresses: - Log time to the project - Tag expenses to the project - Record subcontractor invoices and payments Step 4: Calculate Actual Job Cost At project completion: - Direct Labor (actual hours × rate) - Direct Costs (actual subcontractor + project expenses) - Allocated Overhead (actual hours × overhead rate) - Total Job Cost = Labor + Direct Costs + Overhead Step 5: Compare to Revenue - Revenue - Total Job Cost = Job Profit - Job Profit ÷ Revenue = Job Profit Margin

Example: Job Costing for a Website Project

The Job: - Client: Mid-size professional services firm - Scope: Custom website design and development - Fixed Price: $12,000 Estimated Job Cost: | Component | Estimate | |-----------|---------| | Direct Labor (80 hours × $75/hour) | $6,000 | | Direct Costs (stock photos, fonts) | $400 | | Allocated Overhead (30% of labor) | $1,800 | | Total Estimated Cost | $8,200 | | Estimated Profit | $3,800 (32%) | Actual Job Cost (if the project went over): | Component | Actual | |-----------|--------| | Direct Labor (110 hours × $75/hour) | $8,250 | | Direct Costs (original + additional stock) | $700 | | Allocated Overhead (30% of actual labor) | $2,475 | | Total Actual Cost | $11,425 | | Actual Profit | $575 (4.8%) | The scope creep (30 extra hours) destroyed most of the profit. Without job costing, you'd never know — you'd just see $12,000 revenue and think it was a great project.

Job Costing and Pricing

Job costing provides the data for better estimates: Accurate pricing formula: `` (Estimated Direct Labor × Rate) + Estimated Direct Costs + (Estimated Direct Labor × Overhead Rate) + Desired Profit Margin = Project Price `` With job costing history, you can estimate based on actual data: "My last 5 website projects averaged 90 hours. I should estimate 95 hours to include a buffer."

Job Costing in Accounting Software

Most modern accounting and time-tracking tools support job costing: - QuickBooks Online: Projects feature with job costing reports - Xero: Projects add-on with time tracking and cost reporting - Wave: Free invoicing with project tracking - Harvest: Time tracking linked to project profitability - Toggl Plan: Timeline and budget tracking

Bottom Line

Job costing is the key to understanding which of your projects are profitable and which are money pits. Without it, you're essentially guessing at pricing based on intuition rather than data. With job costing, each completed project becomes a data point that makes your next estimate more accurate — and accurate estimates are the foundation of profitable fixed price contracts. If you don't currently track project-level profitability, start now: pick one project, track every hour and expense to it, and see what it actually cost you to deliver.