A job cost sheet is used to record how much a customer pays for the job once the job is completed.
Job costing is an accounting method designed to help you track the cost of individual projects and jobs. It involves looking at direct and indirect costs, and it’s usually broken into three specific categories: labor, materials and overhead. Understanding costs for a job at this level will help you better budget and plan for similar projects in the future, and you may discover some ways to cut costs or find items that should be billed to the customer. Show
What Is Job Costing?Job costing is a precise method of tracking all the costs and revenue associated with a particular project. Projects might include one-off customer undertakings, manufacturing new products or delivering multiple products that will be developed at the same time. Job costs are typically broken down into labor, materials and overhead — though each of these elements can be broken down further. For instance, labor costs might include both employee wages and third-party vendor fees. Material costs can include both direct raw materials that appear in a finished product and the indirect materials used to create the product, like equipment. Companies must carefully account for and plan around each of these elements to deliver their projects successfully and on time. Job Costing ExplainedJob costing has a few primary goals:
Take the example of a construction company hired to build a high-rise for a real-estate developer. The construction company will estimate every cost and then track every charge involved in delivering the project, including material and equipment costs, team and subcontractor salaries and administrative expenses. Depending on the terms of the contract, the builder may share these details with clients so they can see the breakdown of costs. Additionally, in the future, the construction company can better quote and plan for similar projects armed with specific, real-world examples. Why Is Accurate Job Costing Important?One of the most impactful decision a business makes is what to charge for a product, project or service. In service industries, where the payroll costs are often the largest line item, it can be especially important to incorporate job costing. It’s one of the most important accounting practices for small businesses to reach gross profit margin goals. Accurate job costing can improve profitability, help you better manage employee scheduling and be a key component of prompt financial reporting. Proper job costing leads to better profitability, project estimating, management decisions and timely financial reporting. Accurate job costing helps businesses strike a balance between revenue and costs on any given project by carefully analyzing each step of the job and using historical data to better inform future projects. Meticulous job costing reduces the likelihood of unexpected costs during the project life cycle, which can quickly eat into profit margins and lead to disputes with customers. Accountants and finance departments rely on job costing for back-office processes and tax filing. For example, itemized costs help accounting teams accurately analyze how project expenses can fit into the company’s overall financial picture. Job Costing vs. Process CostingWhile related, it’s important to make the distinction between job costing and process costing. In simplest terms, job costing is a means of quantifying all of the individual costs required to deliver a unique project output like a small-scale manufacturing run. Process costing, on the other hand, breaks down costs over a given time frame, which is particularly useful when the cost of individual units or job outputs can’t easily be differentiated. What is process costing?Process costing is an accounting practice by which companies assign costs to a collection of products or project outputs generated, usually within the course of a month, and use that to calculate a unit cost. Process costing is most often used by companies mass producing many identical or near-identical products at once. For example, a manufacturer of white label rubber gaskets regularly fills orders for thousands of gaskets at once, perhaps on a recurring contract for a kitchen appliance manufacturer. Given that production costs do not vary between individual products — all of the same gaskets cost the same to produce — the gasket company can accumulate manufacturing costs over a fixed time and divide the overall figure by the number of units produced to determine a unit price. What’s the difference between job and process costing?Job costing requires a company to quantify all the material, labor and overhead costs required to manufacture a single job output, such as the previously mentioned construction job or a limited run of a custom item. Process costing requires businesses add all operating costs for consistent, large-scale production of similar items over time, such as white label rubber gaskets, paper straws or smartphones. Who Uses Job Costing?Almost any type of business that provides products or services to clients stands to benefit from job costing. The process can help you better understand your own costs for things like products, parts and even how to manage your payroll more efficiently. The practice is often associated with construction companies, as they work with a rolodex of third-party contractors and each job is different. However, job costing is gaining traction in other industries, including:
How to Calculate Job CostingRather than simply analyze performance from financial documents such as income statements and balance sheets after a job is complete, job costing helps you dig deeper into more granular costs associated with specific projects or jobs. The basic formula includes adding together the costs of labor, material and overhead. But to calculate the cost of a job accurately, it takes meticulous analysis of each step and component of these three areas.
Job Costing ExampleConsider a luggage company that has assigned 10 employees with the task of manufacturing 20,000 new backpacks in time for the new school year. The team has four working weeks (20 business days) to complete the order. The project manager expects to work full time during that period, at a rate of $500 per day. Two warehouse managers and two supply chain managers will each work three days per week (12 days total), at a rate of $350 per day. Five plant employees will work full time to manufacture the backpacks themselves, at a rate of $200 per day. For labor, (20 days x $500 x 1 person) + (12 days x $350 x 4 people) + (20 days x $200 x 5 people) = $46,800 Added to this are direct material costs of $20,000 for the polyester, zippers and additional fabrics used in the bags themselves, as well as indirect costs of new machinery and office supplies, which also add up to $20,000. Added together, total material cost is $40,000. Finally, overhead costs for the four weeks are estimated at an additional $10,000. Add that to $46,800 in labor and $40,000 in materials, and altogether our project cost equals $96,800. Benefits of Accounting Software for Job CostingProject accounting software makes job costing easier in multiple ways, most notably by allowing businesses to break down labor costs for large and complex projects using a simple, user-friendly interface. Additionally, job costing helps automate revenue recognition and monitor and report on profitability. Additional benefits of accounting software for job costing include the following.
Manage Job Costing With Accounting SoftwareJob costing is not a standalone process. It delivers the most value when project accounting software for professional services is integrated with other modules as part of a comprehensive ERP solution. These modules can include human resources, inventory planning, customer relationship management and more. Integrated software solutions make steps in the job costing process simpler with capabilities like automatically attributing employee expenses to the appropriate cost center for better and more accurate tracking. Together in one digital space, these solutions deliver more comprehensive visibility and control over projects across the business, in real time. An integrated approach helps businesses make better use of their resources, deliver projects on time, simplify invoicing and discover ways to reduce overhead, in addition to maintaining healthy customer relationships. The latest accounting software is also highly scalable. From startups delivering niche products to enterprise players running multiple lines of business, users can more accurately run estimates and keep project costs in check. This enables teams to focus on improving productivity, efficiency and profits. Conclusion The expression “time is money” is especially relevant in the context of job costing. Increased competition, tighter project timelines and a volatile customer base have put pressure on businesses to fight for every second and every penny they can save. The first step to cost each job accurately — a task made easier with an accounting software solution. |