When it comes to job costing vs process costing contractors may wonder which accounting system is best for their business. Both enable better decision making and help keep a close eye on the financial health of a project. However, job costing in construction brings certain advantages that process costing does not and vice versa.
What is job costing
Simply put, Job costing is tracking the materials and labor for each job. General and administrative costs, such as the cost of your office lease, are not included in job costs. However, labor burden and equipment cost often are.
Job costing is best utilized by companies providing a number of distinct products or services. Custom home or furniture builders for example will have unique costs associated for each job. Because of this, a job costing system is best. Since they can understand the specific costs regarding labor and materials that went into each individual step of a project.
The first step to job costing is to create a list of all of your material and equipment costs, and your labor burden for each employee.
Taking a look at an example, let’s say a contractor budgeted a total of $4,400 for a job. With $3,000 in labor, $1,000 in materials and finally $400 in equipment. By using a job costing system we learn that the time actually spent by the employees, the actual labor cost, was $3,200 and $900 was paid to local vendors for materials. Equipment rentals incurred a cost of $420. The complete job cost in this example comes out to be $4,520 which is $120 over the estimated $4,400.
Once you know your budgeted cost, the next step is to determine how many materials and hours were actually used. To do this you need a robust and intuitive software like Knowify to keep track of it all. Utilizing construction management software will allow contractors to drill down and identify where costs are exceeding estimates.
Advantages of job costing
Job costing provides invaluable pieces of data about your business. When used correctly and consistently it will serve as a foundation for strengthening and growing your business. Ask yourself these questions as a contractor – am I actually making money? Am I estimating the correct price? Am I scheduling the right crews for my jobs?
Most of these issues and other friction points can be addressed through effective job costing. Collecting and utilizing information on the profitability of jobs on an individual basis is where job costing shines. It can be used to calculate work in progress, total revenue, and enables better tracking of the costs and profitability of change orders.
Keeping track of all job costing data will eliminate assumptions and provide real actionable data that can be used to avoid overspending during a job or while planning an upcoming job. Meaning you can make better decisions on most aspects of your business.
What is process costing
Process costing details the cost of identical products or services. It’s best used for manufacturers who mass produce similar goods in which costs can be evenly averaged out.
Process costing is a more general approach to pricing that divides the total cost by the number of units. As the name suggests it helps identify the specific cost assigned to each process. Companies who offer the same job or products every time can utilize process costing to save time. This includes industries such as oil and gas, food production, and cement and paint manufacturing. Or any instance where large volumes of an identical good or service is mass produced.
Ultimately process costing helps assign a cost to different steps of a job or production process. By using process costing direct and indirect costs can be easily identified.
Advantages of process costing
Process costing is a simple and streamlined approach to tracking costs. Because of this straightforward approach it can make it easier to make changes to processes and can quickly help target where costs are exceeding budget.
However, the simplicity of process costing is a double edged sword. The lack of detail and specificity can create cost errors and can drastically inflate or under-report the actual costs or a job. For this reason any project or job that is unique or custom will benefit greatly from job costing, which is why it is almost never used by contractors.
Using job costing vs process costing will depend on the needs and circumstances of your business. With that said, the vast majority of contractors will reap the benefits of a job costing system. Job costing is one of the most important systems you can incorporate into your business and with modern tools and technology, it’s now easier than ever to collect the data needed for accurate and actionable job costing.
Job costing provides a detailed look at your business. Shedding light on what crews are most or least efficient and what materials are consistently over or under budgeted cost. Having historical data at your disposal from past jobs will make predicting costs for future or similar jobs much easier and will provide a foundation for creating accurate bids more quickly.
If you’re looking to boost profitability and efficiency within your company, Knowify offers a powerful job costing system that can help track costs in real-time and help you see where you stand versus your budget at each phase of the job, helping you to stay on track.