10 Secrets to Successful Job Costing
Secret 1: Practice your vocabulary
An estimate is a detailed breakdown of the projected costs for a project, and if you’ve been doing formal estimating for very long, chances are your estimates are very specific.
A budget on the other hand, will often summarise or group many of the details on your estimate. It can be used by your accounting staff to track purchases and payable invoices against the anticipated costs, and is much less detailed.
Secret 2: What are you trying to accomplish?
If you don’t define your goals at the outset, how will you know what you need to do – or whether your job costing system has succeeded or failed? Write down your initial thoughts for your job costing system, then turn them into specific goals that can be measured and tested.
Defining your goals can be as simple as considering the following kinds of questions:
– What business decisions might be made, or processes changed based on insight from job costing?
– Are there areas of your business that you’ve considered adding or dropping? Are there areas where you feel efficiency or economy can be improved?
– What is your current per-job profitability and by what amount would you like to improve that?
Secret 3: Usability is the biggest priority
You can spend lots of time defining your job costing goals, but if the system isn’t user-friendly it simply won’t work. If the information isn’t being entered the way it should be, the system might even produce misleading information.
If job costing is new to your staff, they will need training and some time to adjust. You want to make sure that supervisors and managers are completely on-board with your approach, so they can help sell it into the rest of the business.
Secret 4: Put technology to work for you
While it’s possible to maintain a manual job costing system, it’s not easy. A better alternative is to use an accounting system specifically designed to accommodate job costing, with these characteristics:
– Flexibility in job cost structure: The system should allow you to design your job cost categories in the best manner for your goals. It should allow alphanumeric codes for the categories and at least three levels of costs.
– Integration of accounting and job costing: If you have to enter separate transactions or use spreadsheets for normal accounting functions and the recording of job costs, the technology is not making you more efficient. Everything should be fully integrated.
– Suitable reports: While it’s tempting to look for the system with the most reports, it’s much smarter to look for the system that offers the best reports for your needs. Ideally, your accounting software should offer reports that show cost breakdowns on many levels, from total costs for the entire company, to costs per category on a job.
Secret 5: Doing what you know
If your employees are not fully aware of the nuances of your job cost system, they will not provide you the information you need to make it effective. After all, they can’t do what they don’t know! Training employees properly is the key to a successful job costing system.
Talk to them about what they should do and show them real-life examples. Give them practice exercises and ask them questions to test their understanding. Make sure they know all of the items that need to be costed, and how to determine the categories. Tell them how the system will benefit them and the business.
Secret 6: Everything plus the kitchen sink
While overhead costs like telephone bills, fuel and marketing are not directly job related, they are costs that you have incurred, and you can’t really understand job profitability without factoring them in. Ideally, the job costing software you use should allow for overhead expenses and performing overhead allocation.
Secret 7: Not just job cost – job profit
One of the obvious goals of job costing is to analyse where you’re spending the most money, especially in comparison to estimated costs. As you implement your job costing system, however, don’t forget that the information you’re gathering can also be used to analyse billings.
Since job costing reflects actual and up-to-the-minute costs, it can provide helpful information about your cash flow, even more so if you use a purchasing system that allows you to track and categorise committed costs. This information can and should be used to determine how often and how much to bill your customers.
Secret 8: Collect the arrows that missed the target
During the implementation phase, you should write down your goals for the system with specific, measurable targets. Then after the system has been in place for a while, dig out that notebook of ideas and goals, and determine how far you’ve come.
The idea is to work out if the job costing system has improved your business – as well as to verify that you’ve accomplished your goals. But even more important than the ‘if’ is the ‘why’. If you’re not meeting your goals, spend some time on the numbers to determine why that is.
Secret 9: A foolish consistency
Once you’ve compared the results to your goals, you should have a general indication if your job costing system is working. The good news is, you’re not locked into the system. If you designed it properly and your accounting system offers enough flexibility, you can run tests on your current system, trying different things here and there.
You may think that consistency is essential, but inconsistent and sometimes correct is much better than consistently incorrect! So don’t be afraid to try new methods or procedures.
Secret 10: A not-so-vicious circle
You’re not done! The three-phase process of implementing a job costing structure is a never-ending circle. Just as your business will grow from your use of job costing, your job costing system will change from the growth of your business. Don’t rest on your laurels – or on your current job costing system. Use the information that you gather from job costing reports to improve not only your business, but your way of doing business.
Please contact us to assist you with your job costing success.