By Ethan Cummings, CPAEven the most well-planned project can become chaotic. When this happens, it can feel like you’re getting pulled in a thousand different directions. One minute you’re answering a subcontractor’s question and the next you’re following up with the client. Tracking the job’s direct costs is probably the last thing on your mind. But letting this important task slide could have a direct impact on your future profitability. Here’s why it’s important to pay special attention to job costing on any project.
What is job costing?
Job costing is the method used to keep track of the direct costs—including direct materials, direct labor, and overhead costs—that go into each job. You can track job costs using your accounting software and summarize them using a job (WIP) schedule.
You can get an overview of your total cost of goods sold, as well as your company’s overall performance, on your profit and loss statement. But job costing gives you a clearer picture of your company’s job-specific performance. By breaking up costs into smaller buckets, you can gauge each job’s profitability and identify areas of under performance. This can help you better understand the types of projects you should pursue down the road.
Best practices for job costing and increasing profitability
Job costing for direct materials
These are the inventory and materials (whether pulled from bulk stock or ordered and shipped directly to the job site) used in the job. If pulling materials from bulk stock held at your offices: Make sure you allocate each material’s cost based on the stock you pull it from, as each stock might be carried at a different cost. Record the cost when you pull the material and code it to the correct job.
Job costing for direct labor
Direct labor is the manpower/time put into the job. You can track direct labor costs using timecards or base it on the specific staff assigned to the job. If your staff members are working on multiple jobs each day, you’ll need to determine the best way to allocate their time to each job.
Job costing for other direct costs
Other direct costs are direct expenses incurred by a job that fall outside of the realm of materials and labor. These could include costs related to equipment, tools, subcontractors, and more. You should be able to trace other direct costs directly to a job.
Don’t forget about job costing for indirect costs
Indirect costs could include equipment, labor, utilities, supplies, fuel, and cleaning supplies—to name a few. Although these costs cannot be specifically traced to a job, they should still be included in your job costing.
Indirect costs are usually allocated to jobs based on a cost driver, such as percentage of total materials or total labor. In the case of equipment costs, you may allocate based on the actual hours the equipment was used on a job. Be sure to look closely at the costs you allocate and the driver you select, so your cost allocations to each job will be correct. It’s important to be consistent in the types of indirect costs you allocate to your jobs, too.
Tips for successful job costing
Make job costing a priority
Take the time to make sure you are tracking and recording the correct costs to the correct jobs. If you and your staff don’t consistently track costs, you’ll be forced to look back to accurately allocate costs to jobs. This can be very difficult. Stress the importance of job costing to your project managers (or those who are responsible for tracking job performance and status). Timely and accurate job costing will help your bookkeeper accurately code jobs into your accounting system, too.
Set up your accounting system correctly
The accounts in your accounting system should be organized to how direct costs and costs of goods sold (5000 level accounts) versus indirect costs (6000 level accounts) versus general and administrative costs (7000 level accounts). Be consistent in how you record your costs to each account.
Use job costing to your advantage
When done consistently and correctly, job costing gives you a powerful insight into your performance and profitability on each project. With this insight, you’ll have a better idea of which projects to pursue and which to avoid in the future. If you’d like to do more with job costing and enhance profitability, we’re here to help. Your John A. Knutson & Co., PLLP can assist you in everything from allocating costs to setting up your accounts. Contact us today to learn more.