Anytime businesses implement new systems, such as a business alarm system, or processes for doing things, employees and managers have to understand the benefits in order to make it work. Similarly, a job costing system can be very helpful to companies of all shapes and sizes. To help your business grow, we will be explaining the impact of a job costing system in your business.
Job Costing vs. Process Costing
If you own a construction business or operate in any of the building trades, you may have heard of job costing and process costing being used interchangeably. However, this is inaccurate. Process costing is the act of identifying the individual steps required to complete a project and determining an average cost for each of those steps. This is done to create a budget by adding those averages. Job costing, on the other hand, is analyzing a job or project by the labor and materials it requires. You calculate those costs and add your additional charge to account for any incidentals. Job costing and process costing are very different. Remember this going forward.
To get started, job costing is a way of accounting costs, such as paper recycling and similar. In managerial accounting, it calculates the cost per job which is usually attributed to a project, client or invoice. Tracking these costs, businesses are able to unlock some helpful information to become increasingly profitable.
However, tracking job costs can be a time consuming task. It may require reconciling receipts, materials, inventory, labor hours, etc. Depending on your business, the job costs will vary significantly. To make this process more efficient, your company can invest in a job costing system that automatically tracks costs. In fact, it can calculate final expenses as well. In addition to the information gained, the company will benefits in other ways as well.
Calculate Margins Per Job
While business have various overhead costs, calculating the cost per job allows managers to track their margins accurately. The job costing system will allow them to see if the job is coming in under or over budget. Of course, managers can make better business decisions on how to manage the completion of a job according to the financials.
Bill Partners, Clients Or Customers
If your business works with clients or customers who provide reimbursements, job costing makes the process simple. Clients can easily see how much the company has spent on travel, parts or materials. If the client is responsible for these charges, they can easily receive the information and reimburse the company, so you do not have to go find cheap energy rates to make up for lost money.
Predict Overhead Recovery Rates
When you use a job costing system, you may be able to predetermine overhead recovery rates. This is because job costing allows you to see the basis of budgets at any given moment. With access to this information, you can make an informed prediction about the recovery rates of your overhead. This is huge for those who struggle with cash flow problems. It would also be incredibly helpful if it could be used to predict the Dubai stock market, but unfortunately this is not the case. However, this is still an incredible benefit of job costing that not many consider.
Manage Cash Flow More Effectively
In addition to the increase capital from reimbursements without the help of bad credit loans, executives can decide how to invest their capital most efficiently. As executives are able to determine which jobs are most profitable, they are much more likely to make smarter investments in the business. If managed competently, the company could see increased cash flow from strategic investments on behalf of the higher level decision makers.
Automate Operations To Track Costs
Most free accounting software will give you the option to input your costs. However, an automated job costing system will automatically pick up costs, assigning them to a specific job. This business automation which ties in with the finance department will save time of employees and managers who would have to allocate costs to each job before sending it to accounting. With an automated system in place, the company will save time and money by skipping unnecessary data processing.
Calculate Direct Material Costs
Of course, job costing systems can determine material costs for project usage. You can track materials per single project. For example, you can track the cost of wood, bricks and cement used to build a house. In fact, you can track the cost of multiple crane rentals. Calculate direct material costs by adding up the material quantity and multiplying them by the price of each item. So, if you are a carpenter and need 100 pieces of lumber at $10 a piece, your direct material cost for lumber is $1,000. Certainly, job costing systems can track materials costs for each project.
Keep in mind, a new company operations process is only as good as its implementation. When trying out a new job costing software, make sure that management and employees are on board with the system. If they understand that the system will make their lives easier, it is highly likely the implementation will be successful. As a result, the company will operate more efficiently and make more profitable decisions, without having to worry about finding the best project management apps to improve productivity.