No matter what business you are in, making a profit is likely one of your overriding goals. Even small businesses utilize a basic accounting ledger to record income, expenses, assets, and liabilities. However, for more complex companies, job costing is a unique accounting tool that provides additional insight into the profitability of individual aspects of a company.
Instead of an accounting system that quantifies and calculates profitability as a whole, job costing allows business owners to determine more advanced elements, including the cost-effectiveness of individual products, services, and processes offered by the company. Because of this, job costing is deemed the most effective strategy to appraise the profitability of different aspects of a company.
Businesses that operate multiple profit centers that continually open and close when new bids are won and completed face a unique challenge – a general ledger will not suffice to see what is going on in the company. How can you benefit most from job costing your payroll?
What is Job Costing?
Defined as the accumulation of the costs of materials, labor, and overhead for a specific job, job costing is an optimal tool for tracing specific costs to individual jobs to determine whether costs can be reduced in later jobs. Though solid revenue streams and quarterly profit statements are valuable indicators of the financial health of a business, determining the success or failure of individual aspects within the company will offer a more comprehensive view of what business elements need to be adjusted versus those that are excelling.
Though traditionally related to the manufacturing industry, where companies utilize this accounting framework to evaluate costs at smaller unit levels, job costing can also benefit businesses in the service industry to track overall costs for each job or service offered. Ultimately, job costing offers businesses detailed profitability reports. While these reports are similar to a general profit and loss statement, they are, however, more detailed and specific to each job, product, task, or service.
Determine Your True Job Cost
It is easy enough to figure total cost when each invoice within your accounts payable is tied to a job; however, this still leaves a lot missing from your true job costs. Labor is more difficult to affix to a job or job area. Within a single day, you may work three hours on one site and another six hours on site prepping for another project. Where does the hour of overtime get assigned? What about payroll expenses incurred on both jobs? With all the complexities that go with determining real costs, contractors can begin small and continually challenge themselves. Keep in mind that capturing your true job costs through payroll is an ongoing process. Continuing improvement is necessary.
Save Room for Growth
Above all else, a successful job costing system must be usable, especially in regard to payroll. To be beneficial, a payroll costing system needs to be understood and practiced at the ground level by employees on their timesheets. In fact, a system needs to be in place where job cost information on timecards can be verified and trusted. In essence, no job cost data is better than wrong job cost data.
A strong start to job costing will provide you with both answers and questions. Though a fully formed job cost system will attempt to anticipate every eventuality for breaking down costs, this will not necessarily leave you with the flexibility to revise, adapt, and grow your costing system as you learn.
Contractors developing their first job cost system are encouraged to start small – think broad and manageable even if this means simply coding payroll costs to a job. There is still a benefit in recognizing multiple profit centers as you track jobs over time.
Know What to Look For
As more detailed systems are used in job costing, contractors accrue a lot of data; however, raw data without any questions is like having a book of answers to all of life’s questions that just sits on the shelf unopened. With so many reports available, contractors should be directed by the kinds of questions they have about their costs, profits, productivity, and labor force. This should guide their data collecting.
For instance, a job-to-date labor hours report will compare estimated hours and cost amounts against actual amounts incurred. A labor unit cost report uses your hours estimates, labor cost estimates, and costs to produce several other sets of data for each cost area on a job. And a labor productivity report will show the number of units completed per hour for each activity or phase of the job cost structure.
Though job costing is never completely mastered, it is important that contractors practice and learn from it to master their expenses and profits. Maximizing job costing efforts will allow contractors to better see their true labor costs to jobs while also more precisely identify productivity successes and lags. This will then guide corrective decisions and build a better budget in the future. While growth can be challenging, taking on job costing one broad step at a time can increase the long-term profitability of any business.