Chris is a busy landscaper, moving from yard to yard. On job A, he plants dogwood trees with help from assistant Sarah. On job B, he works alone to install a garden path. On job C, he works with assistant Joe to trim hedges, mow grass and apply fertilizer.
They’re very different tasks, with a lot of different variables in labor hours and material costs. So how can Chris make sure he’s charging each client enough to not only cover his costs, but earn a profit?
By using job costing—but Chris will get a lot more out of using this accounting method than just a final number for an invoice.
What Job Costing Means
In the most basic terms, job costing is a way to track exactly how much a particular job or project costs you to complete. (Job costing may also be called project-based timekeeping; these terms can generally be used interchangeably.)
Job costing is a comprehensive method of accounting for all of the labor, material and overhead costs associated with a given project. For many employers, using job costing creates transparency around costs, profits and labor allocation. Knowing exactly what a project cost you to complete allows you to set prices for maximum profitability. And from an employee time tracking perspective, job costing is an incredibly efficient way to track how many hours employees are working and how they’re using their time.
Any business that provides individual services to individual clients may benefit from using job costing. It’s not as useful in businesses that provide standardized services. For example, it’s probably not an appropriate accounting method for a grocery store that sells the same things to customers each day—but a caterer who does customized jobs for specific customers could use job costing to maximize revenue.
What Job Costing Looks Like
Project-based timekeeping platforms make it really convenient for employees and employers to track progress. Whenever work is done on a particular project, employees simply log their hours and record any materials used. Many job costing platforms have mobile interfaces so updates can be logged via phone or tablet. Employers can receive status updates and check progress at any time.
Because overhead costs can’t be as easily measured as labor and material costs can, an employer using project-based timekeeping may calculate a predetermined overhead rate to apply to each project. There are a few ways that a business may establish its overhead rate; one way involves dividing its estimated yearly labor hours by its estimated yearly overhead costs. Say a business uses this method and comes up with an overhead rate of $10 per direct labor hour. In a job that takes 20 direct labor hours to complete, $200 in applied overhead would be added to the job’s labor and material costs.
Why Job Costing Matters
Job costing gets multiple things done at once. Using a project-based timekeeping method generates a lot of useful data for an employer—and data is one of your most powerful resources.
- It manages employee time tracking, helping the employer track employee hours for payroll purposes. The benefit of this can’t be overstated. Job costing creates a thorough record of exactly how much and what kind of work any given employee has completed. This could be especially useful in businesses where employees perform multiple roles, but tracking labor allocation in this way can be really useful for any business.
- It’s key for billing ease and accuracy. This is a fundamental element of job costing. Tracking your costs, including overhead, lets you calculate exactly what you need to charge in order to hit your profit target. It’s relatively quick and easy to complete invoices when everything is meticulously recorded. Keeping careful records of your labor and material costs is also useful if a customer ever disputes your prices.
- It allows for real-time tracking. Project-based timekeeping is an ongoing process that starts at the beginning of each new job. Ideally, an employer can check the status of any job at any time and see exactly how many resources have already been allocated to that project. Adjustments can be made if the job is going over budget or over schedule.
- It’s easy to see who’s working on what, and who worked on what in the past. Obviously this is helpful for labor allocation and employee time tracking purposes, but it’s also handy in terms of accountability. The employer can monitor exactly where employees are using their time. If a client raises an issue with a project, or you have a question about a past project, finding out who worked on what is as easy as pulling up your records for that specific job.
- It helps you identify trends. Which customers’ jobs yield your highest profits? If you provide a variety of services, which ones are your most and least profitable? Are there employees who routinely use more materials or take more time to complete jobs than you’d expect to see? These revelations may help you identify holes in your employee training processes, or shift your business’s focus toward those most profitable services.
If you’re a good candidate for job costing, adopting this accounting method could take your business to the next level. Streamlining your employee time tracking and billing practices positions your business for real growth. Check out our companion blog posts, What Industries NEED Project Based Timekeeping and 5 Ways Project-Based Timekeeping Makes Your Bottom Line Better for more information on this topic.
Contact Commonwealth Payroll & HR
If you are an employer seeking efficient ways to track employee time at various locations, clients or projects, Commonwealth offers a multitude of tools that easily allow employees to capture that information electronically once, ultimately translating it to payroll for allocation purposes. To find out more, contact us today.
*The information provided in this article does not, and is not intended to, constitute legal advice; instead, all information is for general informational purposes only. Information in this article may not constitute the most up-to-date legal or other information. This article contains links to other third-party websites provided only for the convenience of the reader.