Job Costing Definition
The basic definition of Job Costing is the calculation of all costs incurred in order to do a Job. These costs can be comprised of raw materials, labour, outwork, and overhead costs.
Definition of a Job
What a Job is will depend on the type of business. A manufacturing business will define a Job as being the process to manufacture one or more products. In some cases, these products will always be made in the same way. An example is a company that manufactures bottles of vinegar. The number of products being made by a Job will also vary, depending on the type of product. Some manufacturing companies manufacture high volumes in a single Job. Other companies will manufacture small quantities often with a high value and often made to order for a customer, for example, a company making specialised trailer bodies.
Other businesses will define a Job as being work done specifically for a customer and where the item is manufactured, is to the customer’s specific requirements. An example here is a company making curtains and soft furnishings.
Jobs are also used in businesses that repair or service items. Motor repair workshops and plumbers fall into this category of business. Sometimes these Jobs will have a Quote done initially, so the price to the customer is fixed in advance, other types will raise a Quote but then add on any extra costs to the final invoice.
In essence, what defines a Job is not the same for all businesses. The common factor is that the actual cost of the Job, regardless of its size or duration is calculated.
Why Use Job Costing?
There are a number of benefits for Job Costing. The main benefit is that the costs of Jobs are accurately measured so that profitably can be calculated and areas, where costs are too high, can be identified and rectified quickly. In some cases, Jobs can be categorised and the average profitability can be calculated over all Jobs in a category. This can help to identify patterns and to investigate specific types of Jobs which are less profitable than others. Job Costing is also used to ensure the selling price of manufactured products are correct and, in the case of a business having more customer-specific type Jobs, that charges are being correctly calculated.
A Job can have an Estimate or a Quote linked to it, which will be used to measure the expected costs and usage against the actual cost. This helps to ensure that Quoting methods are efficient, with all costs being taken into account and realistic labour times being used. The same applies to Estimates.
Creating Jobs assists with planning. Regardless of whether you are manufacturing bulk items, making specific products to order, or repairing or servicing items, having Jobs can assist with the allocation of the resources required and issuing efficient purchase orders to suppliers to avoid time lost due to stock shortages.
Another valuable use of having Job Costing is the control over Work in Progress (WIP). This may not be a factor when the Jobs are low value and of short duration, but for many businesses, it is important to control the value of WIP products.
An Integrated Job Costing Software System
Depending on the complexity of the business, gathering, collating and analysing costs for Jobs can be time-consuming and complex. Often the difficulty of doing all this manually means that it just does not get done at all. An integrated Job Costing software can change all of that.
This is a software package that handles all the Accounting and Bookkeeping requirements as well as handling Stock or Inventory Control. The system allows the various costs, to be allocated to the relevant Job at the point at which the transaction is entered into the system. This drastically reduces the time factor and also improves accuracy. The system can also link Quotes or Estimates to Jobs and information such as raw material requirements and movements can be linked, making planning and WIP control more manageable and efficient. The system can then be used to analyse Jobs making it easier to increase productivity and profitably. These are just some of the basic benefits of having an Integrated Job Costing System which often falls under the ERP (Enterprise Resource Planning) terminology.
Examples of Integrated Job Costing
A company that manufactures custom made off-road trailers.
This company manufactures off-road camping trailers. They have four standard models which they supply to dealers on order but they will also modify a trailer to a customer’s requirements at an extra charge.
When an off-road trailer is ordered, a Job is created with all the customer details. For standard models, a Bill of Materials (BOM) is pulled in, which contains all the raw materials and labour costs that are required to process the order. The Stock Control system picks up the raw material requirements and will show if any items need to be ordered from the suppliers. Certain items may not be held in stock and the system will allow Purchase Orders for these items to be linked to the Job and when the goods are delivered the cost of the items are allocated to the Job automatically. Stock issued from the stock room can be linked to the Job as it is issued, meaning that all raw material usage is captured. Labour timesheets are also captured and linked to the Job, covering the labour costs. Once the trailer has been completed the Job can be invoiced out to the customer. If the trailer was ordered with some custom requirements, a Quote could be done when the Job is created, and once the trailer is manufactured the Quote is invoiced, thus ensuring that the invoice value is correct.
With a fully integrated Job Costing system, all transactions are allocated to a Job at the point that they are entered into the system. Supplier Invoices, Timesheets, Stock Issues, and Sales Invoices all are allocated to the Job, which gives control of the whole process from start to end. The Bill of Materials links into the Stock Control, highlighting shortages. This all gives the ability to extract information about the actual cost of the Job, as well as comparison to estimates as the Job progresses, without the overhead of data being captured more than once.
A plumbing company that does emergency repairs.
In this scenario, sometimes a quote will be given to the customer and at other times, the charge will be for the labour and parts used. A Job will be opened in the system for each job or repair for a customer. In some cases, a Quote will be linked to the Job. As stock or parts are used, they will be allocated to the Job; this can be either part bought from suppliers, parts from stock, and outwork done by suppliers. Timesheets capturing the number of hours worked by various employees will be captured, as well as travel costs and any extraordinary expenses. Once the job or repair has been completed, an invoice will be raised, either from the Quote or otherwise from all the costs incurred during the course of the job and marked up accordingly. As in the first example, reports can be extracted from the system, and once again, transactions are only captured once into the system.
Omni Accounts offers a fully integrated Job Costing solution that caters to many different types of Jobs and business environments.