What is Job Costing and should you use it?

Don’t let the term Job confuse you. Job Costing is a powerful way to analyse the information that you already have in your MYOB file. Whether you would like to track the profit made by separate departments, on a state by state basis, product line or perhaps even a sales sales person, Job Costing is the way to do it.                                                                 

Job Costing is the system used to track the expenses incurred on a job against the revenue which is produced by that job. Job Costing itself is an important tool for businesses that want to compare performance of different revenue areas. For example, building contractors, subcontractors, architects and consultants often use job costing, whereas a hardware store or convenience store would be less likely to use job costing. In short, use it where it counts.

Using MYOB Budgeting will firstly allow a business to compare Estimates and Actuals using the Job costing and in-house accounting software. Further, a Job costing report will help to ensure that all costs involved in a job have been properly invoiced to the customer. You wil then be able to use the results of your analysis to create more accurate quotes when bidding on future jobs.

Using job costing will allow you to identify the most and the least profitable areas of your business, allowing you to focus on enhancing your company’s profitable elements while also addressing the less profitable aspects. Essentially it will help you to quote new jobs more accurately, and assist you in the day to day management of jobs already in progress.

Components of job costing

The most important issue to recognise is that nearly all the information you need is already in your MYOB file. The only extra work involved is to allocate a Job Code to each item of Income and Expenditure when it is entered – a minimal time commitment when you consider all that Job Costing can do for your company.

There are numerous aspects to job costing, and you may use many, some or none of them. If you want to use job costing, you need to:

  1. Track the costs involved in the job
  2. Make sure all of the costs are invoiced to the customer
  3. Produce reports showing details of costs and revenues by job

The fundamental components of job costing are:

  • Quotes – also known as estimates, bids, or proposals
  • Fixed fee jobs
  • Time and materials jobs
  • Revenues
  • Items
  • Direct costs

This all sounds excellent in theory, but to effectively implement Job Costing let’s take a closer look at the meaning of each of these components, and how you might use them in job costing.

Quotes

Most people are familiar with quotes. Quotes are non-posting transactions. They do not affect your financial statements or your general ledger. You prepare a quote to give your customer an estimate of projected costs, before a job is awarded. However, quotes also provide a means to track costs as the job progresses, so that costs do not get out of line, or so that cost variances can be identified and dealt with quickly.

Fixed fee jobs

Fixed fee jobs are an agreement to complete a job for a customer for a set price, no matter what costs are incurred. While this may seem like a good deal for the customer, an experienced estimator will set a price high enough to cover any contingencies, which may result in a higher price than a time and materials job.

Time and materials job

On a time and materials job, costs of labor and materials are passed on to the customer. A markup for overhead and profit may be built-in as a percentage of each item or stated as a separate line item. Time and materials jobs are often preferred by the seller, as any unforeseen costs may be passed on to the customer.

Revenues

Revenues are critical to the life of any business. In job costing, revenues are not only categorised by account, but also by customer, job and item. Think of jobs as sub-categories of customers and items as sub-categories of revenue/expense. This creates a new way of analysing your revenues and the costs incurred to produce them.

Items

Items represent the products and services that your business sells. You may have many items for each of the revenue/expense account categories in your chart of accounts. Using items, you enter the details about what you buy and sell, then “map” or link the detailed items to the more generalized accounts in the chart of accounts. You can map many detailed items to a single account in your chart of accounts. This allows a greater level of detail in the item list while keeping the chart of accounts list concise.

Items focus on revenues; they are the goods and services your company sells. Use service items for labor, and non-inventory items for materials. The non-inventory name just indicates that you are not tracking unit quantities or unit costs; they are still goods and materials that you hold in inventory.

To track unit quantities and unit costs, use inventory items, but be forewarned; do not use inventory items lightly. Using inventory items means that you are tracking and entering unit quantities when you buy and sell as well as reconciling your accounting records to the physical quantities on hand in between buying and selling. This is not an item type for the faint-hearted!

Direct costs

Direct costs are the costs of the products and services sold. These are the costs involved in job costing. Direct costs can be directly associated with a job and can be identified as a part of the finished product. For a mason, direct costs would include the costs of bricks and mortar, as well as the cost of the labor to prepare the mortar and lay the bricks.

While direct costs are distinguished from indirect costs, or overhead, indirect costs are costs that cannot be identified in the finished product; though the costs were incurred, indirectly, in the process of completing the job, and are not included in job cost reports. Examples of indirect costs are rent, insurance and administrative payroll. Indirect costs are not included in job cost reports. Essentially you can categorise direct costs as the cost of goods sold, and can categorise indirect costs as operating expenses.

Think about how you purchase for a job

Can you identify your customers when you purchase materials for a job? If so, then you can enter the job name in the invoice or cheque and associate the expenditure with a specific job. Now you can use MYOB not only to track your expenses by job, but you can also convert those bills into invoices, making sure that all expenses are accounted for and nothing falls through the cracks. By using the same item on the bill that is used on the invoice, your job cost reports will show cost, revenue and profitability by item.

Do you have items that are purchased in bulk and later allocated to a job, so that at the time of purchase you don’t know exactly which customer will receive which item? If so, then you can use standard costs. Since you don’t know which customer will receive the item being purchased, you cannot assign the cost to the customer at the time of purchase, but by using standard costs, the cost will show in job cost reports when the item is used on an invoice.

Do you have large dollar amount items that you keep in stock, and don’t purchase for a specific customer? Use inventory items to track the cost of these items, and your job profitability reports will show revenues and actual costs on a first-in, first-out basis.

Job cost reports

Job profitability summary and job profitability detail reports show revenues, standard costs, billed costs and the gross profit margin by dollar and percentage. These reports may be filtered by customer allowing one to see the details for a specific customer, or filtered by margin to see the most or least profitable items for any time period. Keep in mind that the standard costs you see on these reports are theoretical costs, and are not used in the financial statements.

The job estimates vs. actuals summary and job estimates vs. actuals detail reports compare quotes to bills and invoices, showing the variance between estimated costs and actual costs and the variance between estimated revenue and actual revenue. These reports are useful for controlling costs during the progress of a job, and as a guideline for preparing quotes for new jobs.

Getting Started

Getting started could not be simpler, we can meet with you to discuss your current MYOB file, business setup and reporting requirements. The average cost for implementing the system is $1,000.

Lockwood & Ward staff can have your business using the system and benefiting from a better understanding of your financials within a few months, from which your business can only grow.

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