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Improve profit margins with job costing

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Production affects gross margin, and production means people, which means it’s important to you and important to good business. How productive and efficient your workforce is should be high on your agenda. Job costing allows you to understand the productivity of your workforce on a very granular level, and understanding how to work out the information you need for effective decision making using job costing can see you propel your business forward, fast.

What is job costing?

Job costing is the method of recording the accumulation of costs (materials, labour and overheads) at a small unit level, rather than for a business as a whole. This allows you to understand the expense needed to create a unique product, which is highly valuable for improving operational efficiency and also has an important impact on profitability.

Within industries that have tight profit margins, such as manufacturing, having this insight into line items can have a make or break impact on your bottom line. By carefully reviewing the costs associated with each manufacturing line, you can understand with greater accuracy where your profit margins lie and can identify areas to increase margins through lower staff costs or wastage reviews.

How do you perform a job costing analysis?

To create accurate job costing reports your calculations will require you to know the figures for the following costs:

Material costs

The combined costs of the raw component parts used. This is easy enough to keep track of, but it’s important to make sure you record material costs accurately for each individual job.

Labour costs

Employee time spent working and their rate of pay. Calculating your labour costs accurately requires employees to track the time they spend on each job. The calculation you need to do is: Total employee hours worked x hourly rate = total labour costs

Applied overheads

Allocation of overhead costs from within your cost pools. To calculate your applied overheads fairly, you should look to work out a predetermined overhead rate that you can apply to each job by using estimating overheads and estimated activity. Estimated overheads should be calculated at the start of the year, prior to any work taking place. To work out your predetermined overhead rate, divide your estimated overhead by your estimated activity. Then, throughout the year, calculate your applied overheads using this calculation: predetermined overhead rate x actual activity.

Once you have calculated all of these separate costs, you can put them together in a simple equation to work out your total job cost.

Total Job Cost = Material costs + Labour + Applied Overheads

The importance of accurate job costing

In a manufacturing environment job costing analysis can be assigned to a production line, including your work-in-progress inventory through to the cost of goods sold to analyse the profitability. Collecting all data can be a time-consuming process and when margins are tight, accurate data is vital.

Labour cost analysis, in particular, is sometimes overlooked, with generic wages applied and average time assigned to jobs. But what if you knew which employees, with the right skills, gave you the highest margins? Profitability would increase allowing you to base forecasts on your insight.

How time tracking can improve job costing

A time allocation system allows you to accurately input a valuable third of your equation – labour costs. With employee costs and time spent on a job varying, insight into this data can provide you with the information to make clearly informed decisions. With clear time tracking records, you are able to spot productivity trends based on employee outputs and make informed job allocations based on skills and wage – small changes that can make a big change to your bottom line.

If you’re in need of a capable and effective software to help you track time and attendance for job costing, why not get in touch with Mitrefinch today and see how the UK’s leading time and attendance software can help you.

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