Job costing is an often overlooked yet important component of business, especially for small to medium-sized companies. The pricing of your jobs shapes your bottom line. It can be argued determining the optimal price point for each specific job is one of the most important decisions small business owners make. This is precisely why job costing is so important.
A Plain English Explanation of Job Costing
Job costing sounds inherently complex yet is much more simple than most assume. Job costing is centered on accumulating the costs for labor, materials, and overhead for specific jobs. Job costing traces costs to specific jobs and analyzing them to determine if costs can be reduced in subsequent jobs. It might even be possible to bill additional costs incurred directly to a client.
Job costing encompasses accounting activities with the overarching aim of accumulating costs. The cost of components and materials are accumulated and assigned to the project, product, or service after the components are implemented. Job costing also accounts for overhead costs in the form of cost pools and allocates such costs directly to jobs. Job costing also extends to labor in which employees charge time to jobs that are assigned in accordance with the cost of employee labor.
The result of job costing is groups of information about each job. This information is reviewed by a cost accountant to determine if it should actually be assigned to the specific jobs. If several jobs are occurring at the moment, the challenge lies in assigning costs with a high level of accuracy. However, if necessary, an audit of job costing can be performed to verify accuracy.
Comparisons of costs in the bucket for a project with the budgeted costs are particularly helpful for jobs that are likely to run for an extended period. This comparison helps provide decision-makers with a heads up should it appear as though costs are running ahead of prior projections. In this context, job costing provides management with an opportunity to control costs across the rest of the project or meet with the client to discuss a potential price increase to address the cost overrun.
Strategic Cost Calculating With an Eye on the Bottom Line
Job costing tracks the actual costs required to provide a specific job or service. This process is necessary to ensure the business prices the project at a level that helps reach the profit margin target. Such cost calculating is especially helpful in industries where costs vary from one job to the next. All different types of businesses perform this cost calculating to analyze specific jobs and determine if costs can be cut as time progresses.
In particular, services-oriented businesses in which the work of employees is the product that represents the value proposition greatly benefit from job costing. Service companies require access to KPIs (key performance indicators) in real-time to make strategic pricing decisions, have payroll as a major expense, and tend to lose time more easily than other businesses.
Calculating job costing proves that much easier and more accurate when estimates are obtained from each of the contractors that contribute to a specific project. If your company regularly relies on subcontractors, communicating with them for accurate estimates will ultimately help you make the most of job costing.
Job costing also includes calculating material costs to determine if it is prudent to expand margins to account for additional costs. Instead of making such a request without any tangible numbers-based analysis that shows the extra costs are perfectly legitimate, it is better to present the request backed by job costing. Job costing ultimately makes a much more convincing argument for a margin expansion. In other words, it is what a business makes of the numbers side of a project. Use this analysis in a highly strategic manner, continue to expand your margins, maintain a close eye on the numbers and you will find job costing is quite a valuable tool.
The Logic in Job Costing
Businesses use job costing to determine the following:
- If jobs are on a budget
- If they are within the target margins
- Which clients are the most or least affordable
- How the sales staff should be focused
- Whether it is necessary to add more personnel
Job costing even reveals which employees, departments, and teams are the most and least productive. In particular, job costing is especially helpful for determining which clients should be re-priced or let go. When used properly, job costing identifies opportunities to alter pricing with the underlying aim of boosting the bottom line.
Job costing is particularly important for businesses challenged with optimizing the time of each employee due to various pressures ranging from anticipating market volatility to heightened competition, reduced time for project completion, and insufficient skilled labor. Job costing empowers businesses to pinpoint opportunities that have the highest potential for gross profit and guide employees toward them. Job costing reports are now customized to the point that business owners have a plethora of data at their fingertips that ultimately makes decision-making that much easier and faster.