BUSINESS TIPS Job Costing: A Key to Profitability
© 2003 Door & Access Systems
Publish Date: Fall 2003
Author: Bruce McConnell
Job Costing: A Key to Profitability
By Bruce McConnell
During my travels to door dealers throughout the U.S., the topic of job costing always seems to surface. Dealers want to know how their sales mix affects their profitability and how they can understand it more thoroughly.
All sales and services are not created equally, and they have varying effects on your profitability. Job costing helps you break down certain components of your income statement into more manageable pieces. This process gets you closer to understanding the profitability of each job and how it contributed to your overall business.
First of all, let’s be clear on one point. Any form of job costing is a valuable business practice. All businesses must have a clear understanding of their costs. They are fundamental to helping you price your products and services appropriately so that your gross margins are set at a profitable level. To remain profitable, the gross margins from all jobs must be more than adequate to cover your overhead expenses.
Job costing carries many benefits. It verifies that 1) You are meeting your desired levels of gross margin, 2) Both the material and labor content as a percent of sales are falling within the expected ranges set for them, and 3) All of your completed work has in fact been billed.
Getting started does not need to be difficult. Many job costing methods can be used. Some are simple while others are a little more complex.
Any method, however, will require that you keep track of the direct costs associated with all jobs. At minimum, these costs should include door and operator materials, freight, and direct labor costs.
Simpler and less costly job costing methods are easier, but tend to require some duplication of data entry. The more complex and expensive systems process the data automatically. However, because of their complexity, especially those associated with your accounting package, they tend to require more knowledge and time to set them up properly.
The Simpler Way
One of the simplest methods is a spreadsheet program that has been specifically designed to gather all of your costing information. Using this method will require that someone take the time to summarize both the income and cost data for every job and enter it into the spreadsheet after the job has been completed. The data should come from your accounting system or your job files.
Although this process involves duplicating data, it is an effective way to present the data for review and discussion. Just preparing the report alone can help you get a better feel for your overall costs and margins, while at the same time improving your financial spreadsheet skills. You can become quite proficient at spotting problems quickly, especially if you are processing the data yourself and are working with the information regularly.
The More Complex
In complex methods of job costing, the input data for costs are typically entered into your accounting program as they are incurred and before the job has been completed and billed. These methods can also include using a separate database that is directly linked into your financial program.
Although the additional detail that is required up front can sometimes slow down the initial input process, the data does not need to be entered again when running your costing reports. Set up correctly, retrieving the data becomes a matter of pulling a predetermined report from the system.
On larger jobs, you should estimate job costs beforehand. This will help you submit a firm, reasonable bid. On a large commercial job, this process can save you thousands of dollars in lost profits. After the job is completed, you can cost the actual job to see if you met your gross margin objective.
A successful job costing process will tell you if your current pricing is adequate. This will help you rethink your pricing and manage your costs.
Job costing is a fundamental building block of a successful business. The sooner you start job costing, the sooner you’ll see its value.
Bruce McConnell is president of McConnell & Associates of Dixon, Ill. He has counseled hundreds of door dealers on issues related to financial statements and financial management. He is available at 815-288-3556 or at email@example.com.