One of the toughest tasks a business owner has is pricing their jobs and services. Job costing, or labor cost allocation, measures the actual cost for a business to deliver a product or service to their customers. Getting those numbers right helps the company to stay profitable, keeping the doors open and your employees paid. But with the right cost accounting tools for Dynamics 365, gross profit can be easily calculated for all aspects of your business.

Job Costing Methods

Most companies that do job costing use one of two methods: traditional costing or activity-based costing. While both methods estimate overhead cost and then assign those to a product or service, each does have key differences.

Traditional job costing is the most common, simplistic and inexpensive method to use. Indirect costs are applied to products or services based on a predetermined overhead rate. Those rates are treated as a single group of indirect costs. This system works well when overhead is low compared to direct costs, and when there are only a few different products or services. However, it can be less accurate than the activity-based method.

Activity-based costing is more complex and expensive to implement, but also more accurate than traditional job costing. In this system, indirect costs are broken down into more precise amounts; then they can be allocated to various pools to better determine the actual gross profit on each product or service. Companies who have high overhead and make products rather than services would be best suited to use activity-based costing.

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