Companies that work on customer-specific or long-term projects — such as homebuilders, contractors, custom manufacturers and professional practices — generally track job costs to gauge the profitability of each project. In turn, this helps them bid future projects.
Unfortunately, the job-costing process tends to be cumbersome, causing some expenses to inadvertently fall through the cracks instead of being allocated properly. Here are six tips to track costs more easily and accurately:
1. Make job costing a priority. Accurate cost tracking requires the involvement of every level of your organization. If management puts an emphasis on the proper allocation of every possible cost (be it supplies, equipment usage or labor hours), most employees will gladly help code direct costs within their control to the appropriate project.
2. Set up a user-friendly coding system. Tracking costs begins where employees work. That may be in your office or a remote office, at a job site, or in a factory. Often, that’s where materials are delivered and consumed — and where purchase decisions are made.
Frontline workers know which costs go with which projects. The trick is making it easy for them to flag the job name or number. That helps the person who’s entering transactions into the computerized accounting system identify the proper cost code. Accounting personnel may be tempted to guess when the job name or number isn’t available — or assign it to a miscellaneous cost code, promising to correct it later. To counteract this tendency, your accounting team should be trained to ask questions when job names or numbers are missing. Incomplete transactions shouldn’t be entered in the system until accurate cost codes can be identified.
3. Require purchase orders (POs). POs help make job costing for purchases of supplies and materials more effective. Each purchase should be assigned a unique PO number, and all materials and supplies should be tagged with PO numbers. This helps workers provide the proper coding information when these items are used on specific projects. An effective system helps ensure that no invoice will come to your office without a job name or number on it.
4. Be cautious when handing out company cards. With credit and debit cards, there’s usually no way to include a job name or number on the receipt. When submitting receipts to the office or completing expense reports, workers should be required to identify the project to which costs belong. It’s important to provide cards only to responsible workers who understand the importance of accurate job-costing information.
5. Clearly separate costs. If your company’s chart of accounts and job-cost ledger are set up professionally, cost allocations will become easier and more accurate. Job costs differ from office and overhead costs, so job costs should be assigned a job number that’s distinct from the general ledger account number.
For example, general ledger expense codes typically start with the 5,000 series of account numbers. Job costing becomes easier for everyone if general ledger costs are coded with 5,000 series numbers, while allocated job costs are coded with 6,000 series numbers and office and overhead costs get 7,000 series account numbers.
6. Follow best practices. The job numbers you assign to projects should be carefully chosen following best practices. For example, a good job number isn’t just the next number in a haphazard sequence that starts with an arbitrary number and has three or four digits. Job numbers should convey such information as the year the project started, the activity involved, and whether the expenditure is for materials, equipment rental, labor or subcontractors.
We can help you set up a simple, but effective, job-costing system that conforms to industry best practices. This will make it easier for your staff to enter transactions into your accounting system. It’ll also help your management team identify which projects and customers are the most (and least) profitable — and take corrective actions to improve profitability down the road.
