23 Feb The Benefits of Job Costing in Accounting
Custom jobs require ongoing supervision to achieve the best financial results. Whether you are a general contractor constructing a strip mall, a manufacturer building made-to-order parts, or an architect drawing up blueprints, once a project is underway it is easy to focus on getting the job done, rather than on the resources being consumed.
What is Job Costing?
Job costing, also known as job cost reporting, is an accounting term defined as the process of coding and allocating project expenses to track financial efficiency and profitability. This methodology allows accountants to track the expenses of each individual project for tax and financial analysis purposes. The cost of materials, labor, and overhead are taken into account when the job costing method of accounting.
Job Costing Best Practices
Here are a few best practices to keep in mind when using the job costing method of project accounting.
1. Make Smart Cost Estimates
Proper job cost reporting begins with solid cost estimates. Start each job by arranging the estimates in the same cost categories that will be used to accumulate the actual job cost information. This will enable you to effectively manage contract activities. You also will be better able to compare the actual job costs to estimated costs.
The proper format often depends on how many job-costing levels were used in the estimate. For instance, larger jobs may require phase, activity, or even unit costing. For smaller jobs, totals for, say, materials, labor, and subcontracts are sufficient. If you perform service-type work, your cost information needs may include just job totals by labor, materials, and other direct costs.
2. Determine What Information You Need
What kinds of cost information do you need during and after the job? These requirements depend on the time span of that job and the nature of the work.
Jobs that will be completed over several months lend themselves to more-detailed reporting. The size and scope of the particular job, as well as the software and people available to process and monitor job cost information, also affects the amount of detail you can include Progress reports.
3. Continuously Monitor Progress
Cost reporting during the job is critical to controlling costs. Monitoring actual progress to date compared with planned progress to date determines where the job is at a particular time.
Keep in mind that you cannot take corrective action until you know something is deviating from the plan. That is why executing continuous job cost reporting from the estimate to completion is so important. However, jobs completed within a few days or weeks may not benefit from detailed cost reporting because time constraints make it difficult to identify problems early enough to take effective corrective action.
Also remember, as experienced as you might be, gut feelings regarding how costs are running compared with how they were estimated are usually insufficient. You must obtain facts about the cost activities from jobs-in-process reports. Even if your ‘intuition’ turns out to be correct, it may come too late for you to head off a major problem.
Job Costing is Worth the Effort
Proper job cost reporting takes persistence and, ideally, a good software system. The truth is that better numbers will lead to better results in the form of less costly, more profitable projects.
Need help designing an effective job cost system? Our accounting professionals can help you select software and implement a costing system that is right for you. Contact us today to see how we can partner with you.