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Components of JC PDF Print E-mail
Written by Cecilia Chee, Singapore   
Tuesday, 04 October 2011 11:14

 

 

Components of job costing

There are numerous aspects to job costing, and you may use many, some or none of them. If you want to use job costing, you need to:

  1. Track the costs involved in the job
  2. Make sure all of the costs are invoiced to the customer
  3. Produce reports showing details of costs and revenues by job

The fundamental components of job costing are:

  • Quotes – also known as estimates, bids, or proposals
  • Fixed fee jobs
  • Time and materials jobs
  • Revenues
  • Items
  • Direct costs
  • Standard costs

Let's take a look at the meaning of each of these components and how you might use them in job costing.

QUOTES

Most people are familiar with quotes. Quotes are non-posting transactions. They do not affect your financial statements or your general ledger. You prepare a quote to give your customer an estimate of projected costs, before a job is awarded. However, quotes also provide a means to track costs as the job progresses, so that costs do not get out of line, or so that cost variances can be identified and dealt with quickly.

FIXED FEE JOBS

Fixed fee jobs are an agreement to complete a job for a customer for a set price, no matter what costs are incurred. While this may seem like a good deal for the customer, an experienced estimator will set a price high enough to cover any contingencies, which may result in a higher price than a time and materials job.

TIME AND MATERIALS JOB

On a time and materials job, costs of labor and materials are passed on to the customer. A markup for overhead and profit may be built-in as a percentage of each item or stated as a separate line item. Time and materials jobs are often preferred by the seller, as any unforeseen costs may be passed on to the customer.

REVENUES

Revenues are critical to the life of any business. In job costing, revenues are not only categorized by account, but also by customer, job and item. Think of jobs as sub-categories of customers and items as sub-categories of revenue/expense. This creates a new way of analyzing your revenues and the costs incurred to produce them.

Expenses become revenues; as costs are incurred for a job, they are marked up and passed on to the customer as revenues. To be able to compare your costs to the revenues they produce, you should create matching categories in your revenue accounts and cost of goods sold accounts (COGS).

The accounts in your chart of accounts should represent general overall categories of your business, and not individual customers, vendors or detailed sales/cost information. Those details are recorded using items, the customer list and the vendor list. A sample section of the chart of accounts for a general contractor might look something like this:

REVENUES COST OF GOODS SOLD
General requirements – materials revenue General requirements – materials COGS
General requirements – labor revenue General requirements – labor COGS
Sitework – materials revenue Sitework – materials COGS
Sitework – labor revenue Sitework – labor COGS
Concrete – materials revenue Concrete – materials COGS
Concrete – labor revenue Concrete – labor COGS
Masonry – materials revenue Masonry – materials COGS
Masonry – labor revenue Masonry – labor COGS
Metals – materials revenue Metals – materials COGS
Metals – labor revenue Metals – labor COGS
Wood and plastic – materials revenue Wood and plastic – materials COGS
Wood and plastic – labor revenue Wood and plastic – labor COGS

You should see a pattern in these revenue and expense accounts. Each revenue account represents a category or logical division of the goods and services provided by your business. For each revenue account, there is a corresponding cost of goods sold account. This allows an overview of the company’s direct expenses in comparison to revenues by category – concrete, masonry, wood & plastics, etc. – and a calculation of the gross profit percentage and profit margin by category.

ITEMS

Items represent the products and services that your business sells. You may have many items for each of the revenue/expense account categories in your chart of accounts. Using items, you enter the details about what you buy and sell, then “map” or link the detailed items to the more generalized accounts in the chart of accounts. You can map many detailed items to a single account in your chart of accounts. This allows a greater level of detail in the item list while keeping the chart of accounts list concise.

Items focus on revenues; they are the goods and services your company sells. Use service items for labor, and non-inventory items for materials. The non-inventory name just indicates that you are not tracking unit quantities or unit costs; they are still goods and materials that you hold in inventory.

To track unit quantities and unit costs, use inventory items, but be forewarned; do not use inventory items lightly. Using inventory items means that you are tracking and entering unit quantities when you buy and sell as well as reconciling your accounting records to the physical quantities on hand in between buying and selling. This is not an item type for the faint-hearted!

DIRECT COSTS

Direct costs are the costs of the products and services sold. These are the costs involved in job costing. Direct costs can be directly associated with a job and can be identified as a part of the finished product. For a mason, direct costs would include the costs of bricks and mortar, as well as the cost of the labor to prepare the mortar and lay the bricks.

Direct costs are distinguished from indirect costs, or overhead. Indirect costs are costs that cannot be identified in the finished product, even though they were incurred, indirectly, in the process of completing the job. Examples of indirect costs are rent, insurance and administrative payroll. Indirect costs are not included in job cost reports. Direct costs are categorized on the profit and loss report as cost of goods sold, whereas indirect costs are categorized as operating expenses.

STANDARD COSTS

Standard costs represent direct costs that include a calculated (or estimated) portion of related costs that are not billed separately to your customers. They are often theoretical calculations, done in a spreadsheet, that give a more accurate picture of the direct costs involved in a job. Examples of standard costs include:

  • For every 100 feet of electrical cable installed, on the average we use 20 staples, 6 wire nuts and 2 electrical connectors. The staples, wire nuts and connectors are purchased in bulk and not individually billed to the job. The purchase price for this item is the cost of the electrical cable alone. The standard cost for the item includes the cost of the cable, staples, wire nuts and connectors.
  • For every hour of labor paid, we also incur 8.9% in payroll taxes and 5% in worker’s compensation. When creating this labor item, the purchase price is the hourly cost of the labor. The standard cost includes the hourly cost of the labor, plus the payroll taxes and worker’s compensation.

While you should carefully identify your standard costs, they are used only in job cost reports; they are not the costs stored in the general ledger or reported in your financial statements.

 

Last Updated on Tuesday, 04 October 2011 12:34
 
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