Job Costing Concepts Explained (an overview)
Do you know how much money you make on each job? What were your costs and how many labor hours were spent doing the work? To answer these questions, and others, we use a management technique known as “Job Costing”.
In its simplest form, job costing is the art of applying or associating Costs of Goods Sold (like the cost of labor, materials, subcontractors, and equipment) with a specific job; such as a complete heating and air conditioning system replacement. These costs are later applied against the sale price of the job. Gross profit is calculated and compared to what was estimated. At this point, commissions might be paid based on the profitability of the job.
This topic explains the basics concepts of Job Costing along with an overview. Please see Job Costing Explained for more information.
Manual Job Costing
To understand job costing in Total Office Manager, you must first understand how job costing worked in the days before accounting software. If you use a manual accounting system, you would simply assign an identification number to every job. When a bill is received, checks are written, and timesheets are filled out, they would be “coded” with this number. In fact, every bit of paperwork associated with the job would be coded in the same fashion. Income, expenses, and other information about the job would be recorded in a ledger book. Once the job was completed, these numbers would be totaled and reports would be manually created from these ledger books.
Software like Total Office Manager® simply automates this entire process of manual accounting. The Job Costing feature in Total Office Manager is so powerful; it’s simple. Basically here’s how it works. Everything you purchase, sell, move, or adjust can be “coded” to a specific job or customer. In other words, whenever you receive an item, enter a bill, write a check, create an invoice, make inventory adjustments, add journal entries, do payroll, or any other function that involves money. Literally all money coming in and going out is tagged to a job. It’s that simple and it’s that thorough. Once information is entered into Total Office Manager, it’s reused whenever possible. This saves you a lot of time.
Some Accounting Basics
We must also understand a little bit about how accounting works as it relates to inventory control. When equipment or material is received for a job (paid for or not), it becomes an asset of the company. The amount of the asset is equal to the price you paid for the material. This “Current Asset” can be seen on the Balance Sheet under Inventory. At some point, the material is sold to the job. At that stage, the material is no longer an asset – it becomes a Cost of Goods Sold equal for the amount you paid for it. Cost of Goods Sold is found on the Income Statement.
This entire accounting process must occur – even if you bought the material and delivered it directly to the job. That’s not due to the way Total Office Manager works, that’s the way accounting works. The advantage of this process is that equipment and materials become a cost of goods sold only when they are actually sold; regardless of when you ordered or paid for them. This process is called Accrual Accounting and if you don’t have inventory control, you don’t have Accrual Accounting.
Unless your company has true inventory control, equipment and material become a Cost of Goods Sold (COGS) the instant you pay for them. This is true regardless of when you ordered them, use the items or even how many you end up not using on the job and returning to stock (your warehouse). That’s why some of you see significant swings in your profitability from one month to another.
For example, You buy equipment and various materials for a job (COGS) at the end of April. The job starts in May and you begin to start billing for this work. April looks terrible due to all of those costs and no related sales. May looks great because there are sales with no COGS. This process is called Cash Accounting, which is completely inappropriate for the management of a service or contracting company.
Total Office Manager’s Job Costing Features
Here are some quick and easy ways to utilize Total Office Manager effectively to help you with your job costing process:
1. When entering customers and jobs, Total Office Manager allows you to create a unique “parent-child” relationship. This creates a visually appealing and a very practical hierarchical presentation in the customer:job lists. Here is an example of what it looks like:
TGI Friday’s Corporate (parent)
TGI Friday’s Store 102 (child)
Job AH-266295 (grandchild)
Phase 1 (great-grandchild)
Phase 2 (great-grandchild)
TGI Friday’s Store 103 (child)
Job AH-229086 (grandchild)
American Home Builders (parent)
Division 120, Lot 12 (sub-job)
Division 120, Lot 13 (sub-job)
Division 120, Lot 14 (sub-job)
Customers or can be entered and then you can add as many children (or subs) as you wish. Children can be ten deep and there is no limit to how many you can set up. This means you could enter a home builder as a parent. The individual homes would then be entered as children. Reports could be generated for the entire builder (all homes) or on just one home.
2. The Customer:Job form includes a unique Job Info tab. This tab allows you to enter details about a job such as a complete description, prices, status, and more. You can even associate an Estimate that has been created in Total Office Manager. Another extremely unique feature that seems to be exclusive to Total Office Manager is the “Assign Extra Overhead” feature. This allows you to assign a fixed or variable amount of overhead to a job. This amount is designed to cover the costs of doing a job that cannot be captured through conventional job costing. Examples include rent, utilities, and other general and administrative expenses.
3. Customers or jobs can be “inactivated” once they are completed or you no longer wish for them to appear in the various selection lists. This gives you all of the advantages of deleting without losing history.
4. A very unique feature in Total Office Manager is the Document Manager (version 4.2). This feature allows you to create images, documents, spreadsheets, and other files anywhere on your computer. These files can then be dragged onto the job for reference. Examples might include sales proposals, change orders, photographs, warranty paperwork, manufactures specs, blueprints, or whatever else you can imagine.
5. Set up the Total Office Manager® Invoice Item list (inventory items) so that you’ll have both an expense and an income aspect to each of the items (IE: Serialized and Inventory type). This will allow you to track your costs and your income; therefore, providing you profit by item. And yes, this means you must have true inventory control to have true job costing.
6. As you purchase equipment, parts, and other materials, make sure that you utilize the Items tab so that it will record the cost to the appropriate item. In addition, make sure to assign your customer:job information to each line item so that you’ll have the costs associated to the appropriate customer:job for job costing.
7. Record your sales through the invoicing or sales receipt process as you normally would. Be sure to select the correct customer:job. This will record the income and COGS aspects of the items.
8. Total Office Manager’s Reimbursables feature means you will never forget to bill your customers for items and labor bought for their job. The Reimbursables utility can be opened from the Sale\Invoice form and includes a list of everything you have purchased for the job; even labor. Adding these expenses is as easy as a few clicks of the mouse.
9. Use the Time Sheet (time tracking mechanism) feature in Total Office Manager® so that you and your employees can track their time by item and customer:job. Remember that there is no dollar value associated with Time Sheet entries until you actually pay the employees within Total Office Manager®.
10. A complete historical summary of a job can be seen from the History form, which is found under the Menu button of any Customer:Job form. Literally every piece of historical information about a job can be seen here. Double click on any piece of information and Total Office Manager instantly takes you there.
11. Total Office Manager® has preformatted reports that you can access job costing information quickly. Total Office Manager includes the ability to provide reports for any time period you select. These reports are found under the Report menu. Included are Job Costing Detailed and Job Costing Summary reports. Total Office Manager also includes specialty reports such as Sales by Technician (in version 4.3) and Invoice Analysis by Technician. Total Office Manager even allows users to print an Income Statement by Job, Customer, or Technician (in version 4.3). Now that’s unusual!
12. Most reports include “Drill Down” capability. This means that when you double click on a dollar amount that interests you, Total Office Manager instantly creates a detailed report that explains where that dollar figure came from. Double click again, and Total Office Manager takes you to the original record that started it all.
13. Total Office Manager has the ability to job cost payroll taxes too. This feature is not found in current versions of QuickBooks® and most other software programs.
14. Another feature closely related to the Job Costing feature is Total Office Manager’s Departmentalized Financial Statements feature. Total Office Manager allows you to create a complete set of departments. The departments may then be tagged to each and every bit of income or expense. A typical setup might look like this.
Example Department Setup
Please search Job Costing for more information.