Part six of the SEMA Recession Survival Series, entitled “Job Costing Systems That Will Boost Your Cash Flow,” presented by SEMA Accounting Manager Tom Aiono, revealed that by effectively assigning costs to specific jobs, you can better manage and, thus, increase your cash flow.
Aiono emphasizes the importance of job costing as it identifies exactly how much it costs to construct a project in terms of labor and materials and your markup. Job costing will also help you predict costs of future projects.
“By having an effective and good job costing system, it helps you become more competitive in your industry,” said Aiono. He states the importance of weekly meetings with supervisors and managers to determine how well the job costing is being implemented.
“The key of job costing is to stay under budget,” said Aiono.
During the presentation, Aiono provides a sample job-costing document created from a Microsoft Excel worksheet. Aiono uses SEMA and its monthly publication, SEMA News, as the sample project. He outlines how much it costs for SEMA to advertise the SEMA Show within SEMA News. Aiono details how to list the total cost for the printing and publishing of the SEMA Show advertisement. Some of the costs that Aiono lists includes unit costs, material costs and labor costs.
"This is an example of how job costing can improve your organization in terms of increasing your profitability, how to be more competitive, and how to effectively and accurately report on your job cost to produce or manufacture a service or product," said Aiono.
Here are two questions that Aiono addressed during the Q&A session of the webinar.
Q: How do you decide whether to use material cost, labor cost or other basis as the foundation for the basis of allocating overhead?
A: Great question. The most accurate answer I can provide to your question is based on the cost driver. We know that it is almost impossible to trace indirect labor and materials to a specific project, and we also know that it is impossible to complete a project without incurring indirect costs.
In the example I provided, I chose the direct labor-hours as the sole allocation base because of PAPI’s business environment. PAPI is a highly intensive, labor driven operation, so it was only fair to use the direct labor-hours to accurately measure how individual projects use indirect costs, such as salaries paid to supervisors, production support staff and other company resources.
Other companies might decide to use the direct material-hours as the foundation for allocating indirect costs. The best decision about which cost driver, direct labor or materials should be used as the foundation for allocating indirect costs depends on the nature of the project and operation. However, please keep in mind that once you established a foundation base, either the direct labor or materials, all projects/jobs will utilize the same foundation base from this point forward. This will add consistency to your reporting and decrease complications.
Q: When conducting a job-costing exercise, what time frame is used for fixed and variable costs?
A: Once you established a foundation base (direct labor or materials) to allocate indirect costs in your accounting system, you can print job cost reports at anytime, and you should be able to see all costs posted to each project. The accounting system is set up where direct costs associated to each project are recorded daily through data entry (Payroll and Accounts Payable), and indirect costs are allocated based on the foundation base. As far what time frame is used for fixed or variable costs, once the project has been assigned a project number and entered in the accounting system, it is considered active and all costs can then be posted to it.
For an audio download of the entire presentation, please visit www.sema.org/sei and access the Learning Center Course Catalog.