Job Costing Job Costing
The Job Costing system performs the following functions:
•Provides customization of the dictionary of cost codes.
•Provides monitoring of every phase of the job.
•Provides tracking of dollar amounts and quantities of material used to date versus the budget.
•Provides tracking of the progress of jobs in detail and immediate analysis of the costs.
•Provides detailed information on Change Orders. Each change order is also marked as internal, approved, pending, or rejected.
Job Costing Overview
From a management point of view, Job Costing is often a major justification for purchasing an accounting software system. Job Costing allows management to track the progress of jobs in detail and analyze the costs. Accurate, current, immediate analysis reports allow management to analyze what is really happening on every phase of every job. Cost overruns can be spotted early and controlled. The progress of every phase can be monitored to allow wise, realistic scheduling and avoid costly delays.
The usefulness of the Job Costing system is dependent upon the accuracy and timeliness of the information fed to it from other modules of the system. Timesheets, invoices, billings and field reports are the sources from which job cost reports are built. Job Cost information will be only as accurate and current as the information that goes into it. For this reason, even though paychecks may be written on a biweekly or monthly basis, timesheets should be entered and posted at least once a week. Likewise, although checks may be issued to vendors only once a month, invoices should be entered and posted on a weekly basis. This will ensure that accurate job cost analysis reports are available at least once a week. It is important that analysis reports are run on a regular (weekly) basis so that successive reports will reflect consistent intervals of change.
Job Costing Options in System Setup
The Job Costing system offers a great deal of flexibility. The usefulness of the system is based on an understanding of the system options. The system must be organized and setup to a company’s particular situation. Many options are specified in the System Setup module. This includes such information as the number of digits in a job number or a cost code, the system’s interrelationship to the General Ledger, the assignment of burden, the use of square footage information and modifying the methods the system uses to project costs.
Following is a brief description of these options.
Job Numbers
Job numbers may consist of up to ten alpha-numeric characters. This system can accommodate almost any job numbering system. All job related information entered into the system must be coded with a job number and cost code. For this reason, it is wise to adopt a format that is brief but still serves the company’s needs.
Cost Code Numbers
The cost code format may be from one to ten alpha-numeric digits. This range is large enough to accommodate almost any coding scheme. The cost code system has been designed to use standardized numbering systems adopted by the CSI and several other organizations. The standard version of the CSI numbering system is based on five digit cost codes. A more expanded version uses six digits. A portion of the standard version is included in the Cost Code Dictionary Listing. This coding scheme includes almost all phases of contracting and leaves unassigned numbers for coding system expansion. Most companies rely entirely on this standardized list. If the list is not adequate for a company’s needs, it is a very helpful base from which an adequate list can be developed.
Cost Type
The cost codes in the ‘Codes File’ represent specific job phases but do not specify whether the phase relates to materials, labor, subcontracts, etc. Once these codes are assigned to a job, an additional character must be added to the end of the code number to specify the code ‘type’. The type is specified as follows:
L-Labor
M-Materials
S-Subcontract
E-Equipment
G-General
B-Burden
For example: 09900 may be the cost code for painting. Code 09900L would represent the Labor involved in the painting, 09900M would represent the cost of the paint and supplies (Material), code 09900S would be used if the painting were Subcontracted out and code 09900E might be used to represent any Equipment costs involved in the painting. Type G might be used for costs that do not belong to the other categories, such as special permits, bonding premiums or other items that don’t fit the standard types. Burden would be used for any additional labor costs. This may be additional insurance costs other than Worker's Compensation and Liability.
Group Code
A group code may be added to the end of each cost code. This code is alpha-numeric and may be from 1 to 3 digits in length. Its function is to allow all cost codes with the same group code to be subtotaled on the Job Cost Analysis Report. The group code may be used for two main purposes.
First, the grouping code may be used to further subdivide a cost phase. For example: if a four unit apartment complex were being constructed, it might be desirable to track costs for each unit separately. As an example, cost codes for tracking a masonry subcontract could be created as 04000SA, 04000SB, 04000SC and 04000SD, where A,B,C and D are the grouping codes. This type of phase subdivision can also be used for separate wings of floors of a building or for several identical structures on the same job.
A second use for the group code might be to distinguish among several subcontractors working on the same cost code. For example: if the Concrete phase of the job is being subcontracted out to three separate concrete subcontractors, each subcontract would receive a distinct group code. These codes might look like this: 03000S1, 03000S2, 03000S3. All three subcontracts are associated with the concrete cost code, but each can be tracked and reported separately.
Subtotal Digit
This option controls how subtotals are determined on the Job Cost Analysis Report. Two levels of subtotals may be assigned in System Setup. The two levels function in a slightly different way. A digit is specified in the cost code format which is used to determine the range of cost codes included in each subtotal. For example: if the fourth digit is specified, all codes with the same number in the fourth position from the right will be subtotaled. The codes from 16000 to 16999 would be subtotaled since the fourth digit from the right is the same for this range of numbers.
A second subtotal level may be specified. If a subtotal is specified for a digit in the cost code format, subtotals will be produced every time the digit changes. For example: if the second digit is specified, the system will produce a subtotal for all codes between 02019 and 02029.
If both types of subtotal levels are set, subtotals will be printed for both. For example: a subtotal would be given for 02030 to 02039 (second digit) and for 02000 to 02999 (fourth digit).
See Setup: Job Costing for a detailed description of the subtotaling levels.
Material Variance
This figure is set in System Setup and represents the degree of accuracy of estimated costs on material cost codes. If ‘10%’ is specified as the material variance, the amount budgeted for a material code will be accurate within 10 percent.
The material variance is used to determine if the cost-to-date figures for material cost codes are accurate. Inaccurate cost-to-date figures maybe due to the time lag between the receipt of the material on the job site and the receipt of the invoice in the office. If material is delivered before the invoice reaches the office, the field report will specify that a higher percent of the material has been received than indicated by the actual cost-to-date.
The system uses the cost-to-date and the percent complete to calculate the projected cost. If the projected cost is lower than the budget by the material variation percent, the system will assume that the cost-to-date figure is inaccurate. The budgeted amount is used as the projected cost when the cost-to-date figure is inaccurate.
For example: assume the material variation is 10 percent, the budgeted amount is $100, the recorded cost-to-date is $20 and the reported percent complete is 50 percent. The projected cost would be $40. Because the projected cost is more than $10 (10% x $100) less than the budgeted amount, the cost-to-date amount is assumed to be inaccurate.
Labor, Equipment Units
The unit normally used to measure labor is hours; however, some companies estimate and budget labor costs in terms of the associated material unit. For example: the labor for pouring concrete pillars may be estimated in terms of dollars per pillar rather than hours per pillar. The system may be setup to allow the entry of the unit of measurement during budget entry. The Job Cost Analysis report will analyze the labor on that code in terms of the entered unit. Field reports will ask for quantity-to-date figures from the job supervisor in terms of the specified unit.
Methods for Estimating Completion Cost
In System Setup, estimating completion cost may be accomplished by one of three methods. The method selected determines the information requested on the Field Report. The information used to calculate the estimated completion costs on the Job Cost Analysis Report is also determined by the method of estimating completion costs.
Percent Complete Method
The first method requires field reports to be updated with the percent complete for each cost code. The cost to complete that percent of the job is projected to get the estimated completion cost.
Total Estimated Cost Method
The second method requires the field reports to be updated with a new total estimated cost for each cost code. This means that although last week the project manager estimated $500 to complete a phase, he can now see that it will cost $550.
Estimated Cost-To-Complete Method
The third method asks for the additional cost to complete. The estimated amount to finish each job phase is entered. For example: if the previous estimate was $1,000 and the current estimate is $1,250, then $250 would be entered through ‘Field Report Entry.’
Job Costing Data Files
Dictionary of Codes File
The Dictionary of Codes file is a dictionary of the cost codes used in budgeting a job. This file should include a wide enough selection of cost codes to cover the needs on all jobs. Additional codes may be added or removed at any time.
Job Header File
The Job Header file contains the information about the job as a whole. This includes job name and address information, project supervisor’s name, contract amounts, total billings and receipts, architect information, financing institution and loan information, square footages and a table of certified payroll crafts and associated wage rates and fringe packages.
Job Cost File
This file contains one record for each budgeted cost code. The information contained in each cost code record will vary depending on the type of cost code. Cost code records will contain budgeted amount, unit type, budgeted quantity, quantity-to-date and cost-to-date.
Transaction File
The Job Costing system does not have a transaction file of its own. All transactions made to cost codes are recorded in the General Ledger Transaction File. Each cost code record in the Job Cost File contains a reference to all the transactions made to that cost code in the General Ledger Transaction File. The system uses this reference to produce complete history listings of the transactions made to any cost code. The sum of the transactions in General Ledger Transaction File equals the cost-to-date figure in the cost code record.
Control Accounts
Job Costing is a subsidiary of the General Ledger. This means that Job Cost accounting is an expanded, more detailed record of a portion of the General Ledger. In turn, the General Ledger contains a condensed record of all job costs. The Job Cost detail is condensed into one or more General Ledger accounts. These accounts in the General Ledger are called Control Accounts. Although the General Ledger record is more abbreviated than the Job Cost record, the total amounts of the General Ledger control accounts must equal the total amounts of the cost code records.
The balance between the job cost records and the General Ledger control accounts is maintained automatically. Whenever a job related transaction is entered into the system, indicate the job and cost code. Each cost code record contains the number of the General Ledger control account to which the transaction is to be charged. The system will automatically charge the transaction to the correct control account in the General Ledger. A single entry to a cost code will simultaneously update the job costs and the General Ledger. The job cost amount total will always be equal to the total amount of the control accounts.
It is possible to get the General Ledger out of balance with Job Costing. If a transaction is charged directly to one of the control accounts through the General Ledger, a corresponding transaction to the job costs would not be made. This will make the totals in Job Costing different than the totals in the General Ledger.
Warning: Transactions should never be made directly to a control account!!
In Setup Accounting Options, six General Ledger accounts are setup as control accounts for Job Costing. These six accounts will be the ‘default’ control accounts for labor, material, subcontract, equipment, general cost codes and burden. As a budget is entered for a cost code during job set up, select the ‘default’ control account or enter another General Ledger control account.
Cost Projections
Projecting completion costs for budget items is an important feature of the Job Cost Analysis Report and the Financial Status/Bonding Report.
The system may be tailored to handle cost projections in two ways: 1. the system will calculate the completion cost based on a reported percentage of completion, or 2. the operator will enter the estimated completion cost and the system will calculate the percentage of completion. For method (2), there are two options in system tailoring. Enter either the total new estimated completion cost or the change in the estimated completion cost; the result is identical, a new completion cost is specified.
The following discussion applies only if method (1) has been selected. If method (2) has been tailored, the estimated completion cost will always be assumed to be accurate and current and the field report status flag will have no effect on calculations.
The basic method of projecting a completion cost is to divide the current costs by the reported percent complete. This gives the completion cost. For example: the budget for an item is $100.00. Currently the item is 70% complete with a current cost of $65.00. The projected completion cost would be $65.00 / 0.70 = $92.86.
Often field reports are not current and/or invoices have not been received. This means that cost-to-date figures are not current. Even though one or both of the numbers used to project completion costs may be inaccurate, the system makes some assumptions to get a reasonably accurate projection.
Field Reports Are Not Current
If field reports are not current, the percent complete is not accurate. A reasonable estimate of the percent complete may be obtained by comparing budgeted quantities to actual quantities used, or by comparing budgeted costs to actual costs.
The estimated percent complete would be the actual quantity divided by the budgeted quantity. For example: a budgeted quantity of 25 cubic yards and an actual quantity used of 20 cubic yards would yield 20 / 25 = .80, or 80% complete.
The accuracy of the estimated percentage depends upon the accuracy of the budgeted and to-date figures. In most cases it is easier to estimate the quantities required than the costs. Because of this, the system will estimate the percent complete from the quantity figures first. If the budgeted or current quantities are zero, the system will use the budgeted and actual costs to estimate the percent complete. After the system has arrived at an estimated percent complete, it is compared with the last reported percent complete. The greater percent complete calculation is used to project the costs. If field reports are not current, the percentage complete should not be less than last reported.
If both quantity and cost budgets are zero, the actual cost-to-date becomes the projected cost.
Cost To-Date Figures Not Accurate
This is a situation that is unique to material codes due to the time lapse between arrival of materials on the job and the receipt of the invoice at the office. A current field report may indicate that 70% of the material has been received, but the cost-to-date figure in the system may be only 25% of the budget. Material costs are usually estimated and budgeted fairly accurately. In System Tailoring, a material variance was entered that indicates the maximum percent of error to be assumed for material budgets.
If the projected cost is less than budgeted cost by the material variance, the system will assume the cost to date is not accurate. In this case, the budgeted amount is used as the projected cost. If the projected cost is greater than the budget by any amount, the system assumes a cost over-run and uses the calculated projected cost.
Special Handling for Labor Codes
The most difficult costs to budget and control are labor costs. The system assumes that labor budgets are not very accurate. Material cost estimates are usually quite accurate. Also, for each material code there is usually a corresponding labor code for installation or handling of the material; therefore, for labor codes in combination with material codes, if the computer is required to estimate a percent complete, it will use the material code first to calculate a percentage complete for the material. It will next calculate the percent complete figures for the labor code then compare the two figures. If the variance between the two percent complete figures is within the percent of accuracy specified for material estimating, the material percent complete will be used to project labor costs. If not, the labor percent complete will be used.
Using the techniques outlined above, the computer is able to reasonably project job costs using a minimum amount of data.
Note: The special and somewhat complicated methods for estimating the completion cost outlined above are only used when field reports are NOT current. In order to exercise control over the completion cost calculation, accurate field reports must be entered and specified as being current. Under these circumstances, the estimated completion cost will always be simply the cost-to-date divided by the percent complete.
Current & Completion Variance
The CURRENT VARIANCE and COMPLETION VARIANCE are calculated in the following manner:
COMPLETION VARIANCE =Projected Cost - Current Budget
CURRENT VARIANCE=Completion Variance X % Complete
Reports Produced
Eleven job cost analysis reports are produced by the accounting system. These reports use the data supplied by Payroll, Accounts Payable, General Ledger, Purchase Orders, and Accounts Receivable to produce accurate cost and quantity figures for each cost code on each job. Costs are analyzed with respect to quantity used and percent complete. Cost projections are calculated. These help management spot potential cost overruns and other problems. The eleven report formats available are: Complete, Costs vs. Budget, Job Manager, Purchase Order Review, Budget Revision Worksheet, Job Position,Comparison, Estimated vs. Actual, Paid vs. Unpaid Invoices, Cost vs. Revenue, and Analysis with Summary.
This is a listing of the transactions charged to each cost code.
There are four different types of reports
The Job Cost Summary By Cost Type report is a brief summary of each of the jobs. It gives one line of information on each job. This information includes the job name, job number and cost-to-date figures for Labor, Materials, Subcontracts, Equipment, Burden and General cost codes. These six figures are added together to give the total cost for the job. At the bottom of the report, each column is totaled for all jobs by Labor, Materials, etc.
The Job Billing Income Summary report shows the original contract, current contract, amount billed, retention held, amount received and amount remaining on a job or contract.
The Job Cost vs. Billing Summary includes summary cost and billing information.
The Comprehensive Job Summary is a one-page all-inclusive summary of the job. This report features a Profitability summary, a Cash Position summary, an Earned vs. Billed summary and a Cost Breakdown by cost type.
Forms are produced by the system to be given to the project manger. These forms break the job down according to cost code and ask for an update on the progress of each code.
Forms are produced by the system to be given to the job supervisors. These forms break the job down according to cost code and ask for an update on the progress of each code.
Financial Status/Bonding Reports
The Contracts in Progress Financial Status Report is often referred to as the Bonding Report. The system maintains the contract price, budgets, costs-to-date and amount billed to-date for each job. It has the ability to calculate other important information that must be on a bonding report. The system allows a company to edit contract prices and amounts billed-to-date. A job may also be marked as inactive. Inactive jobs are not printed on a bonding report. This report is designed to meet the requirements of bonding companies. It shows the financial status of all jobs. It also analyzes the amount billed to date versus the amount completed.
This is a listing of the codes in the Codes File. The dictionary of codes is a useful reference when working with other modules in the system. All those responsible for coding new jobs, entering time sheets, entering invoices, etc. should have a copy available.