When most people think of job costing they think of construction businesses. But you can us job costing in any business that has multiple streams of income that are significant to that businesses bottom line. Job costing is all about assigning the proper costs to individual project or jobs, to help determine its profitability. In order for you to determine if your business is prosperous, you have to know whether or not the services you are providing are generating a profit. Now remember generating a profit does not necessarily mean you have large amounts of cash lying around. But we’ll go into in another blog.
So the first thing you need to understand is that your job profitability is not your net profit. Job profitability is your gross profit broken down into the different segments, projects or jobs that make up the main service component of your business.
Direct costs. These are all of the costs that are directly associated with your job. They consist of materials, labor and subcontractors costs that are directly attributed to the creation or production of a specific good or service. For example, if you are building a house, the cost of the employees working on that house plus the cost of all the two by fours and concrete are all costs directly associated with building the house and should be accounted for as such.
Indirect Costs. These are costs that are not directly associated with one specific good or service, but can be attributed various good or services. They are often times referred to as construction overhead costs. An example of these costs would be the small tools purchased and used to build the house in my previous example. Because you are using this small tool on more than one house you can allocate a portion of the cost of that hammer to all of you projects.
Gross Profit. This is the difference between the revenue generated from a specific job reduced by the direct and indirect costs for that job. If you add up the gross profit on all of your jobs, it should equal your total gross profit for your business as a whole.
What industry is your business and do you use job costing? If not, do you think job costing could add value to your recordkeeping?
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