What is the Purpose of Job Costing?
Learn what makes job cost accounting a valuable tool for construction companies.
The purpose of job costing is to keep a detailed record of income & expenses for individual projects. This method keeps job data separate, making it easier to analyze financial data on a per job basis.
Why do construction companies use job costing? With so many general accounting packages available, some business owners may wonder why they'd need anything else. Programs like Quickbooks have been used for accounting for so long that they've become synonymous with accounting software. But, while those programs can be great for a standard business, they lack the specific features needed for a construction company.
There are several ways in which a construction company differs from a standard mom & pop store. First, it's project-centric. The work revolves around various contracts, all of which have their own unique requirements. Another big difference is expenses. Construction is a very cost-heavy line of work. There is labor, materials, and equipment to consider. This is all in addition to regular overhead, like office expenses.
There are many companies that get by with standard accounting software, but when you see the benefits of cost accounting, you'll understand why they're missing out.
An ice cream store is a great example of a standard business model. The accounting is pretty straightforward because the business activities all revolve around one central thing—selling ice cream.
An ice cream shop would have several expenses. Some of them include, renting the store, payroll, utilities, and paying the ice cream manufacturer. All of these costs directly correlate to selling the ice cream in the store. This makes the accounting fairly simple.
All those costs, along with sales revenue, can be used to calculate the company's profit. But what if the business provided several services? Standard accounting would make it difficult to see which business activity is most profitable. All the costs would be lumped together, regardless of which job they were incurred on. We need a way to separate out those expenses.
Durham Construction provides everything from drywall and remodels rebuilds to new home builds. Each company has their strengths and weaknesses, and its best to know what each of those are. In the case of Durham Construction, they tend to be most profitable on their remodeling jobs. How do they know that? Because they use job cost accounting.
As expenses roll in each day, the accountant enters them into their job cost accounting system. The company buys $250 worth of nails for a new home build. When the accountant enters that data, the system requires that a job is specified. That expense is now tied to the new home build. A batch of concrete was purchased on another home remodel, so those expenses are tied to that job. All project-related costs are categorized neatly.
What is the benefit of categorizing expenses by job? Reports. Reports are now much more helpful, because they are specific. Instead of saying, "Overall, we made a profit this month." The management can say, "We made a profit on all our remodels, but it looks like our new builds aren't going so well." Durham Construction sees that that sometimes they lose money on their new builds, but they're consistently turning a profit on remodels. Maybe it's a temporary problem, like high material costs. Maybe it's consistently a problem because it's just not the company's forte. Either way, now management has the ability to make an informed decision on the matter.
After the CEO confers with the accountant, the business chooses to focus on remodels for the next 18 months. They stop advertising their home building services and focus their marketing dollars on remodels. As a result, after six months they find they've increases revenue by 25%. They're grateful they were able to find the drag on their profit. If it wasn't for their job cost accounting software, they might not have been able to make that pivot.
As we illustrated, software that's built for construction companies is going to be a better fit as a contractor. Generic software can get the job done, but you might be missing out on important insights. You might be missing out on profit.
A-Systems has served construction businesses longer than any software provider. We've been making construction accounting software for 46 years. A-Systems JobView is a well-tailored solution for the industry.
If you're considering upgrading your accounting system, you've probably got questions. We'd be happy to help however we can. Give us a call at 800-365-6790.
This article provided a brief example of how cost accounting can benefit a contractor. In order to get a more in depth look into job costing, see this article.