For more complex businesses in the service, manufacturing, and other industries, job costing is a unique accounting tool that gives more insight into the profitability of individual aspects and elements of the company.
No matter what business you are in, making a profit is most likely one of your forefront goals. Even one-person, internet-based businesses probably have a basic accounting ledger to record expenses, income, assets, and liabilities. Instead of setting up an accounting system that quantifies and calculates the profitability of the business as a whole, job costing allows business owners and accounting managers to determine the cost-effectiveness of individual products, services, and processes that the company offers. Job costing accounting, then, is widely considered to be the most effective strategy to appraise the profitability of different elements of a company. Below, we offer a complete rundown on how job costing works, the advantages it offers, and the top features to consider when comparing the best job costing software on the market.
What is Job Costing?
Job costing is defined as “the accumulation of the costs of materials, labor, and overhead for a specific job. This approach is an excellent tool for tracing specific costs to individual jobs and examining them to see if the costs can be reduced in later jobs.”
Most businesses do not produce just one product or offer one service. Rather, the different product and service offerings within a given company combine to affect the overall financial situation of the business. While solid revenue streams and quarterly profit statements are important indicators of financial health for a business, discovering the success or failure of individual elements within the company can give a more detailed and comprehensive view of where the company is excelling and what aspects of the business need to be adjusted.
Traditionally, job costing has been related to the manufacturing industry where companies can use this accounting apparatus to accumulate and evaluate costs at smaller unit levels. For example, a construction company that makes pre-fab houses might use job costing software to determine the profitability of each different part of the building or home that is being constructed in the warehouse. This detailed cost-effectiveness analysis would allow the pre-fab construction firm to find how to further cut costs for each element of the final product. This, of course, positively impacts in the overall profitability of the homes being constructed.
Job costing, however, can also be useful for businesses in the service industry. Project managers or accountants can use this accounting method to track the overall cost of each job or service offered. This detailed and thorough picture of where the company is financially succeeding is useful in determining how to shave costs from production or payroll, or how to bill extra costs to the end customer.
The end product of job costing accounting are detailed profitability reports. These reports are similar to a general profit & loss statement for the company, but the reports are more detailed and specific to each job, task, product, or service offered by the company.
Benefits of Job Costing Software for Businesses
According to one recent report, 40 percent of small businesses are profitable, 30 percent break even, while another 30 percent are continually losing money. For businesses that are just breaking even or losing money, job costing software can allow managers, accountants, and other key players in a company to specifically calculate the profit earned on individual jobs and tasks within the company. For a small business that financially broken even last year, discerning which elements of the company need to be remodeled or removed is often guesswork.
A detailed set of reports provided by job costing software, however, would remove the speculation associated with how to improve the financial viability of a business venture.
For example, a small company developing different computer software might find that one of their products is generating 150 percent profit margins while another is actually losing money. This data can help managers and business owners better ascertain which specific tasks and jobs should continue to be pursued as the company moves forward.
Another advantage of integrating job costing software into your accounting or finance department is that this software is easily integrated with other digital solutions for your business. Many job costing software programs are easily combined with traditional payroll software options such as QuickBooks.
Furthermore, job costing can also be merged with time and attendance tracking software. For businesses in the service industry, this merger of software products can give thorough data relating to which members of your workforce actively participate in jobs and business tasks that are most profitable. With this information, managers and HR personnel can devise workforce policies that stimulate increased productivity and profitability, while also making decisions on the optimum number of employees needed for business tasks.
Job costing systems can also integrate more specific data related to labor costing systems and task allocation. This can help you develop more effective workforce management policies, assign your top employees to the most profitable elements of your business, and reduce unnecessary workforce and production costs.
There are dozens of different job costing options on the market today. The best software for your business will obviously depend on the industry you work in and the specific needs for your company. In general, however, the best job costing software products should include some of the following features:
- Purchase order processing: This feature will give you immediate allocation of orders to jobs for up to date projected cost figures.
- Integration with payroll and other software products: Thesystem allows managers to record direct labor and expense costs for a complete digitalization of the workplace.
- Customizable Analysis: Every business is different and this feature will allow managers and business owners to categorize individual jobs by project manager, type of work or other criteria.
- Interactive and Easy to Use Data Reports: Lastly, the best job costing solution should also deliver succinct financial summary reports that will make it easy to discover where profit is being earned and where losses are accumulating.
Job costing software is yet another tool associated with the digitalization of the workplace. When used correctly, this software option can increase the long-term profitability of any business.