13th July, 2016
As business owners, we all work hard to get the most profit from our business. So why would you take a stab in the dark at the true cost of producing a product or service?
Using the accounting approach of job costing is a great way to provide transparency to particular jobs or projects in your business. It involves allocating expenses to each particular job or project so you can clearly see what the cost of each job is — and whether or not it was profitable.
Job costing results in discrete ‘buckets’ of information about each job and provides useful information to improve the overall performance of your business. Direct labour expenses, materials, and in some cases an allocation of indirect expenses are assigned to each job.
Most manufacturers use job costing already. For example, a furniture manufacturer would allocate the cost of all the materials used to build a chair, as well as all of the wages incurred in assembling each type of chair.
Staying on top of increasing expenses and labour productivity is the challenge here. If employees spend more time than expected on jobs, the cost per product will increase without necessarily being reflected in the sales price.
If the manufacturer wanted more detailed information, they could also include a portion of indirect expenses, such as utility bills.
For example, if the utilities bill for the month was $5,000 and each production line for each piece of furniture used the same amount of utilities — and there were five production lines — then the business might decide to allocate $1,000 for utilities to each production line per month.
The allocation of indirect expenses is really only useful for high turnover businesses (more than $1 million) that need that detailed level of information.
For the service industry, direct costs primarily include employee wages (including superannuation) and expenses specific or unique to each job, such as travel. For example, law firms may consider each individual client to be a job and track how many hours a client’s needs consume each day, thus providing the labour cost.
In a service business where most jobs or clients have similar needs, it may be possible to determine which employees cost the least per job and therefore are the most efficient.
What about other indirect costs such as management wages and office expenses?
Of course you can do an arbitrary allocation for each job or project, however, a word of warning here. First think about how you are going to use the job cost information. If it is going to take a lot of time to separate the indirect expenses between each job or project, and the information provided at the end of the job cost is not that relevant, then it is probably best to stick to direct costs only.
Understanding the true cost of each job or product or service you provide can springboard your profits quickly.
Implementing a job costing system will deliver many benefits to your business including:
Increased profitability: Once you know the true cost of each job, then you can price accordingly and skew your marketing to those jobs, products or services that are making the most money.
Improved employee performance: Job costing allocates direct wages expense, which means you have information at your fingertips on how long each employee is spending on each job. You might find that some employees are particularly efficient at certain tasks, and reassigning jobs to fit employee strengths could boost productivity.
Continual monitoring of costs: If you are allocating direct costs to each job, then you will be reviewing these costs all the time. This type of discipline in business is known to keep costs at bay.
Accurate costing: This means that your quoting will be accurate to make the profit you want each and every time.
Process efficiencies: As each job is costed in detail, it allows you to review the process of the job and identify any bottlenecks that have caused a delay and subsequent increase in costs. This will ensure that you are continually improving your production processes. (Hint: Use MYOB’s free Value of Time tool to see how much extra revenue you could generate by improving processes.)
Most accounting packages have the capability to do job costing, which makes it easy to record information and access detailed reports. Use the reports to track each job and keep your focus on making sure each job or project is making money.