Basics of a Job Costing System

All businesses revolve around finances. This is what makes accounting so essential to every organization regardless of its size.  At Ignite Spot, we like to take every chance we can get to convert people to the dark side - erm, educate others on the finer details of accounting! Having an understanding of how accounting works can help business owners vastly improve their company’s financial stability.

One of the primary challenges many businesses face when it comes to finances is determining the right price point for their products and services. Figuring out exactly how much to charge for your work is a difficult process and one that can have a huge impact on your success.

Luckily, there are systems and tools that can help you refine the process and land on a price point enticing your customers while keeping you in the black. One such tool for determining pricing is the job costing system.

What is a Job Costing System?

A job costing system, or a job order costing system, takes the known expenses of any service the organization provides and estimates the cost of a future project based on the specifics of the project. Job costing involves approximating the expenses of three primary aspects of the job in question: materials, labor, and overhead.

Job costing is particularly useful for businesses which provide services or products varying in cost depending on the customer specifications. For example, a custom home building contractor might work with a client to nail down the specific expectations for the finished product. Once the details are known, the contractor would use a job costing system to approximate the cost of building the home specified by the customer.

Using the above example of custom home building, we can talk about the three primary expenses mentioned earlier: materials, labor, and overhead.

Material Costs

Materials for a custom home change drastically depending on how the big the desired home is, what type of materials are requested (such as marble floors or brick walls), and even where the home is to be built. Some regions may require specific materials due to environmental factors. Furthermore, the cost of different materials can vary based on where they are purchased and how difficult they are to transport to the job site.

Labor Costs

Labor costs can easily be based on obvious things, such as the number of people needed for the job and the hours necessary to complete the work. The location of the job can also impact labor costs by requiring you to provide transportation and potentially lodging to workers. Additionally, you may need to hire local workers instead. Labor laws and taxes can vary depending on the location as well.

Overhead Costs

Overhead is the one expense which is least likely to drastically change, depending on the specifics of the job. Management fees need to be considered for job costing, but these don’t generally fluctuate too much. That isn’t to say overhead costs don’t change at all. One overhead cost that can vary from one custom home build to another would be depreciation on company-owned equipment (not every job will require a bulldozer or a crane). Sales and marketing expenses can also change from job to job depending on how the company lands its clients.

Adding it All Up

Using a job costing system to calculate all of these expenses for each project provides you with a consistent and accurate price point that will ensure your proposals are competitive and lucrative. If you need help working out all the details of your organization’s finances, give Ignite Spot a call. We can guide you through the implementation of a job costing system or aid you in any other financial aspect of your business. Contact us today to learn more.