To understand the profitability of a potential project, you first need to know what things cost and factor them in. This requires job order costing, a process that puts a price tag on every process in your supply chain.
This is not only important, it must also be done correctly. This piece will look at the job costing process and how it should be done right.
What is job costing?
Job costing or job order costing is the method a company uses to determine the cost of manufacturing items for a particular project. The primary elements considered when performing job costing are labour costs, material costs and manufacturing or factory overhead, but each of these will have subsets that need to be conserved such as third-party fees. This needs to be done with precision to ensure that projects are concluded successfully, on time and within budget.
What are the important features of job order costing?
As mentioned above, the three main features to consider when job costing are material, labour and overhead costs. Here’s a closer look at each of these.
When manufacturing products, you have to determine both the direct and indirect costs of your materials. The direct costs relate to raw materials that are used in the manufacturing of the product. The indirect costs of materials are those needed to supplement the production process. When manufacturing wooden furniture, the direct cost would relate to the wooden materials and nails. However, the indirect costs would be items such as oils needed for the maintenance of the equipment.
Another feature is the cost of your employees involved in the production process. Once again, these can be subdivided into direct and indirect labour costs. Your direct labour refers to those employees whose day-to-day job is directly related to the creation of the product. However, the running of a business requires more than just those involved in production. There are administrative staff, cleaning staff and others who all contribute – albeit indirectly – to the process.
Factory or manufacturing overheads
Where you perform your operations will also factor into your costing – as every venue has costs involved. Besides material and labour costs, you will need to consider elements such as water and lights, cleaning products, tax requirements, and even the depreciation value of your property and equipment. This all goes into how much a job will cost you.
How to calculate job costing
The sheer quantity of items that need to be considered when job costing is vast, but it must be done. Now that you understand the ‘what’ it’s time to move on to the ‘how’. Here’s an overview of the steps that need to be taken.
Step 1: Establish the scope of the job
Sit down and consider all the factors that will contribute to the project so that you understand the scope before outlining an estimate. The time frame, material requirements and other elements must be considered. In furniture manufacture, you’ll need to look at everything from the amount of wood needed to the electricity consumption.
Step 2: Cost calculation
Once you’ve established an itemised list of the job requirements, it’s time to put price tags on those elements. Remember to incorporate both direct and indirect costs so that you’re not out of pocket.
Step 3: Establishing a comparative base
While some of the elements can be worked out in isolation, much of the job costing requires you to compare it with previous jobs done. For an experienced company, this can be a fairly simple undertaking as it means comparing costs from a previous job and factoring in inflation and petrol price increases – among others. For new businesses, this will require a bit more research.
Step 4: Quote for the job
Once you’ve put your job costs together, you can submit this to the client as a quote for a potential job. If your client is happy with the costing, they will accept the quote and you can begin work on the job.
Step 5: Maintain your cost sheets
Unfortunately, job order costing doesn’t end at the quote – you need to constantly monitor the cost of the job while in operation to ensure you’re remaining within budget. This ensures you’re on top of any incorrect costing or inefficiencies before they snowball.
Step 6: Cost revision
On successful completion of the job, you need to go over your costing and update it with any additional costs incurred or savings made, which will then be provided to the customer. This way, they’re able to understand the final amount.
Who uses job costing?
There are many organisations that use this process in their project planning. These include:
- Marketing and advertising agencies
- Construction companies
- Consulting firms
- Energy utilities
- Transportation and logistics providers
- Health care providers
What are the advantages of job costing?
There are many reasons you need to perform a thorough job costing ahead of a project. These include:
Establish job profitability
There’s no reason for taking a job if it isn’t going to be worth your while financially. Through job costing, you’re able to establish the actual amounts you’ll owe for material, labour and overhead and how much you’ll have to charge to make the project profitable.
Creating a database
Once you’ve performed enough job costings, you have a really valuable collection of data that can be drawn on for future projects. It does take some time to put together, but once you’ve done a few, you’re benefitting from a useful database from which to work.
Monitor your costs
Another great benefit of job costing is it makes you analyse how much you’re spending, directly or indirectly, and where you can improve operational efficiency. You might find yourself overstaffed. Or possibly that you can reduce your electricity consumption. Implementing cost-saving technology can really assist in the long run.
What’s the best way to cost jobs?
There’s no doubt that job costing is a really massive undertaking. Fortunately, there is innovative software that can automate the process for you. An integrated software solution, such as ERP, includes modules related to inventory planning, human resources, customer relationship management, etc. Through this software, you’re able to monitor your costs and quickly run estimates.
The benefits of job costing software include:
- Quick estimations
- Real-time reporting
- Accurate job costing
- Reduction in customer conflicts
For a customised ERP solution that makes job costing that much easier, contact Omni Accounts today.