Job costing can help you track the profitability of your business and use that data to constantly improve the profitability of your work with clients and customers. In this episode of the Mission Business Podcast, Bernard Roesch shares an overview of job costing and how it can be implemented in your business
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Interviewer: While your business may be a passion of yours and you may be doing it to help people, at the end of the day, a business needs to make a profit. It might be easy to know that you’re profitable when you’re starting a business and things are simple, but it’s important to have good profitability measures in place, especially as the business grows and things get more complicated.
Today, Bernard is going to share with us a process called job costing and how it can help your business. We’re also going to talk about what you can do out of today’s episode to start using job costing in your business.
What Is Job Costing?
Interviewer: Bernard, to start off, can you explain what job costing is by giving us an example of a specific business situation where job costing would help?
Bernard: Job costing is essentially a process of matching costs against a particular set of revenues.
Let’s take an example of a contractor who is contracting with me to renovate my basement. Then he’s going to say “I think it’s going to cost $50,000.00.”
- The contractor is going to begin to work, and he’s going to buy lumber and have people coming in.
- What the contractor needs to do is, as the job progresses, he needs to know how much cost he has already expended on the job, and hopefully his total cost will be less than the $60,000.00 that he would have quoted me.
- Furthermore, the contractor is going to bill me on a progress basis.
- He’s going to charge me 1/3 upfront, and then more, and then the final bill.
- The contractor needs to know how much of the job is completed, and keep the costs and the billing on a parity basis so that he’s always able to cover his costs any point of time.
- That would be an example of job costing.
It’s not something you buy; refrigerator and you sell it. It’s something more complicated when you you are actually producing something – a service, a project, and you are combining labor and materials, and you want to accumulate costs and see what a total cost is, and then compare that to your revenue.
How Would My Business Benefit From Using Job Costing Effectively?
Interviewer: When you’re calculating the profitability of a job, it sounds like that’s something you’re either doing in real time or looking back at the data from a job. How does this data help you in the future? Is it something you can only benefit from by looking back on jobs or is it something that you can use in future jobs also?
Bernard: There are many, many uses of job costing.
- One of them as you do job costing is you actually focusing on your costs, and therefore as you bill the customer, you’re going to be able to bill the customer appropriately.
- You’re going to be able to identify items that are extras, for instance, that should be billed extra.
- You’re going to be able to monitor the job as you go, and you’re going to be able to have the conversation with the customer in terms of what the costs are and how much you’re billing the customer.
When you’re done, of course, then you know your books are closed and you know how much money you made on this job.
Then going forward when you have the next customer that asks you to also renovate his basement, then you can go back to that other customer’s job and see how that went.
- When you are producing that estimate for this next customer,
- You can go back to this database of jobs that you have and see what the costs were,
- How much labor you used,
- How much lumber you used, and
- Refine your estimating skills using the history of job costing that you have.
How Can I Track The Cost Of My Own Time?
Interviewer: I think one question that a lot of the listeners may have is, if they’re actually a business owner, and they’re working within client projects, how are they suppose to track the cost of their time? For example, we talked about labor hours and cost of hours that you’re spending with other people and other team members that you are paying hourly.
How does the business owner quantify the actual cost of their own time and set, for example, an hourly rate that they use for themselves within the job costing system?
Bernard: The main thing for the business owner is first to keep track of his or her time. That itself is already a challenge because the biz owner maybe going in all kind of directions, is not really paying himself or herself.
In terms of assigning an hourly rate, it’s really a matter of assigning a market rate.
- In other words, if I’m doing bookkeeping and I’m the business owner, what would I have to pay a bookkeeper to do a similar function?
- If I’m doing CPA-type work, then I would have to value my time at what it would take me to hire a CPA to do the same work.
- It’s really a matter of ‘what is the activity and what is the general market cost of that activity?’
What Types of Businesses Would Benefit From Using Job Costing?
Interviewer: To wrap things up, one last question I have is, I know we’re talking about a lot of service-based businesses or businesses that involve labor and materials. Am I correct in assuming that a product-based business that is holding inventory, buying at a certain price and selling at a certain price; a product-based business like that wouldn’t necessarily use job costing to measure their profitability, right?
Bernard: Correct. If you’re just a wholesaler; you’re buying a refrigerator and then you’re selling it, or you are an apparel retailer, you might just be buying and selling. There’s no real job costing.
On the other hand if you are a baker, and
- You’re making a batch of 100 loaves of bread, then you may have job costing because
- You may have flour and you have different components,
- You’re making a batch and that gives you the total cost for those 100 loaves of bread.
- If you’re a manufacturer as opposed to a wholesaler or retailer, you may also have job costing.
Interviewer: Perfect. I think that’s going to be helpful for the different types of businesses that are listening today.
Can I Do Job Costing In QuickBooks?
Interviewer: One last question is for the listeners that are actually using QuickBooks in their business, are they able to do job costing directly within QuickBooks or is this something that needs another piece of software to be added to the business?
Bernard: No. Job costing is fully-featured in QuickBooks, all versions of QuickBooks.
- You can setup your items in terms of the type of materials or services that go into the jobs.
- You can setup different jobs for different customers.
- You can take care of the capture of the job cost, and you can also do you billing.
- You can use the job cost information to bill customers if you have customers that are being billed on a so-called cost plus basis; meaning costs plus some profit.
Interviewer: Great. Hopefully this has been helpful for the listeners.
A Quick Recap And Next Actions
Interviewer: Job costing is really something that’s going to help you track the profitability of your business, which becomes more and more important as the business grows and becomes more complicated.
As Bernard mentioned, if you’re already using QuickBooks, you actually have the system in place to use job costing in your business; it’s easy to log the data and actually use that data.
If you’re interested in speaking with Bernard about how to actually setup job costing within your business using QuickBooks or even with other systems, visit his website at MissionBusinessPodcast.com. There’s a lot of resources on the website related to job costing, as well as other financial aspects of running your business. Once again, the website is MissionBusinessPodcast.com.
Thank you so much for your time today, Bernard.
Bernard: You’re very welcome.