More goes into a job than just the material goods that are sold. Services businesses must also factor in labor, travel, incidentals and overhead costs in order to accurately track their profitability. Integrating your accounting so that you can receive an accurate picture of how much money you are really making on every job.
What exactly is meant by Job Costing?
Job costing, generally means a specific accounting methodology used to track the expense of creating a unique product. It includes costs of material, labor and overhead for a specific job and is an excellent tool for discovering specific costs and determining if they could be reduced for future jobs. It is also helpful in determining passing along costs to customers and adjusting your fees.
This method offers wonderful “sections” of information about each job that the decision maker can review to see if each item should be assigned to that job. This is especially important for jobs that run over a long period of time. Proper costing, can help management make decisions about reigning in costs or adjusting billing to the client, heading off a potential expensive oversight.
Materials
The physical materials for a job or project make several bookkeeping “moves” during the entire job costing process. This can become rather complicated, for example, knowing when to transfer material “scrap” to overhead or cost of good sold. Or when to transfer from a work-in-progress inventory to a finished goods inventory. Then when the product or project are sold, when do you remove the asset from the inventory account and shift it to cost of goods sold, while also recording the sale transaction? This is why it is so important to have someone who understands the ins and out of job costing and can help you accurately track your inventory.
Labor
In job costing there are two types of labor. One is direct labor and the other is indirect labor. Direct labor is labor that is traced to a specific job. Indirect labor includes labor that is related to the job but not specifically traced to it. Indirect labor is put in to the overhead cost pool and then allocated to open jobs. Once a job is completed, it is then moved into a finished goods inventory account.
Overhead
Reporting overhead accurately and consistently is the key to successful job costing. It can also become a time-consuming process. The important point here is to be consistent in charging the same types of costs to overhead in all reporting periods and to consistently apply these costs to jobs. Otherwise it can be very difficult to explain variations from month to month.
As you can see, there is a lot of detail that can go into creating an accurate job costing report. However, having this information is crucial in making accurate business decisions. If you would like more information in how we can help, please let me know. Once you have a clear picture of where you are, you can better plan for where you want to go.