Why is job costing important?
Understand the importance for your business
Understand the importance of accurate job costing in your business. Our guide will give you all the information you need to know.
What is job costing?
Fundamental business skill is pricing jobs and services accurately so as to achieve the target gross profit margin. Job costing involves managing, tracking, controlling and categorising the costs incurred with every job or service offered. This allows you to keep track of where your money is being spent so that you’re coming away with the desired amount.
Who uses job costing?
Job costing is typically used in the construction industry, however, there are many other industries benefitting from this valuable functionality. These include:
- The healthcare industry – hospitals, clinics and doctors’ offices
- Private investment companies
- Engineering firms
- Accounting firms
- Law firms
- Advertising and marketing agencies
- Distribution organisations
- Food processing organisations
What calculations go into job costing?
There are many financial factors that will go into job costing, and while certain elements will change depending on the industry, these are the biggest factors to calculate for a specific job or project.
– Labour costs
You will have to assess how many staff members will be required to work on a job or project on a daily basis, and then determine the costs involved. The labour costs will also include any sub-contractors that will be brought in if your organisation requires such, so this calculation will require an estimated daily payroll for outside operators as well.
– Material costs
It’s important to consider all relevant material costs for any job, referred to as Bills of Material. In terms of construction, material costs will be related to timber, screws, wiring, and more. However, outside of the direct Bills of Material, it’s also vital that you factor in the indirect material costs related to items such as cleaning products and supplies.
– Overhead costs
These are the operating costs related to any job and can often be the most difficult to determine as you have to rely on an approximation, rather than the actual figure. Some of the overhead costs you will have to include are:
- Administrative costs
- Rental
- Utilities
- Insurance
- Office equipment (computers and telephones)
- Salaries (outside of those directly related to the project)
- Office supplies
- Depreciation costs related to equipment used
Some businesses, for better or worse, will charge a blanket overhead fee – such as 10 per cent of the job total. However, a job costing software system will help you deduce a much more specific amount, which works out in your favour in the long run.
Some job costing questions
Job costing allows businesses to identify opportunities and minimise overheads. A thorough job costing analysis will include questions, such as:
- Which are the most and least possible clients?
- Do we need to re-price clients?
- Are we running our jobs on budget and reaching target margins?
- Do we need to hire more staff?
- Who are the most productive employees?
- Can we identify any operational inefficiencies?
- Where can we direct our sales’ staff?
The advantages of job costing
Effective job costing will make a huge overall impact on your business operations. Here are a few ways your business will benefit:
– Enhanced profits
Job costing calculates individual projects, allowing you to determine which jobs are more profitable, and either re-evaluate or drop less profitable ones.
– Better performance
Using job costing you are able to evaluate individual performance data, which allows you to identify which employees are performing, and which need some assistance.
– Overview
You are able to assess the cost of every project, including all items and services, which gives you a better understanding of the business expenses overall.
– Flexibility
Determining overhead costs can be quite tricky, however, job costing systems will allow you to easily calculate these across various projects, for everything from small business to major operations.
– Enhanced accuracy
Modern job costing systems are incredibly accurate, so you can start a project without concerns about hidden costs.
Which job costing system to choose?
One of the biggest decisions comes down to selecting the right job costing software system for your particular business needs. This is an application of Enterprise Resource Management (ERP) software, and it’s important to partner with a reputable supplier that will match you with the correct job costing software, provide installation and necessary training and assistance.
