One of the toughest tasks a business owner has is pricing their jobs and services. Job costing, or labor cost allocation, measures the actual cost for a business to deliver a product or service to their customers. Getting those numbers right helps the company to stay profitable, keeping the doors open and your employees paid. But with the right cost accounting tools for Dynamics 365, gross profit can be easily calculated for all aspects of your business.
Job Costing Methods
Most companies that do job costing use one of two methods: traditional costing or activity-based costing. While both methods estimate overhead cost and then assign those to a product or service, each does have key differences.
Traditional job costing is the most common, simplistic and inexpensive method to use. Indirect costs are applied to products or services based on a predetermined overhead rate. Those rates are treated as a single group of indirect costs. This system works well when overhead is low compared to direct costs, and when there are only a few different products or services. However, it can be less accurate than the activity-based method.
Activity-based costing is more complex and expensive to implement, but also more accurate than traditional job costing. In this system, indirect costs are broken down into more precise amounts; then they can be allocated to various pools to better determine the actual gross profit on each product or service. Companies who have high overhead and make products rather than services would be best suited to use activity-based costing.
Industries that use Job Costing
When people think of job costing, they often think of manufacturing, construction, and service industries – having to track labor, materials and equipment to a particular job.
For example, construction costs for each project can vary greatly from job to job. First, you need to add the labor of all your staff, plus the costs for any subcontractors that you need to bring in. Then, there’s all the materials such as lumber, screws, caulking, wiring, concrete, etc. Don’t forget to add a margin to cover shipping or waste disposal charges. Finally, you have all the overhead: office expenses, travel, advertising, equipment depreciation, taxes and more.
The medical industry also relies heavily on tracking costs of labor and materials. Hospitals and clinics use job order costing to determine how much to charge each patient. Since each patient's experience can vary according to their needs, the accounting team creates a separate job order cost for each service to make sure the hospital is making enough money to support their resources.
The film industry has so much happening behind the scenes that movie-goers do not see. Job costing is used to track employee salaries as well as the cost of props, costumes, set location and filming equipment. Some film studios also use job sheets as estimates to determine how much it will cost to purchase each item and hire each employee in order to build a specific budget for each film. Once the budget is created, they hire their film crew and purchase the necessary resources to make the film. Every time an employee works, they typically submit a time card to track the project they worked on. Each film item and other resources are tracked on the job sheet.
Cost Accounting with Dynamics 365 Business Central
The most efficient and profitable businesses utilize their accounting systems (not spreadsheets) to track ALL expenses. This includes adding automations with time and expense tracking, integrations with your payroll system, and more. Using software to do your job costing will vastly increase your accuracy, and decrease manual calculations, minimizing the chances for mistakes.
Job time sheets are created, submitted and approved in Project Pro, transferred into Payroll NOW to process payroll, then posted to the payroll Business Central journals. These payroll transactions can be also transferred back to the job journals to show the full burden of the employee or resource, giving an accurate costing of the labor for that specific job.
The following shows the process from the project employee and manager to the payroll professional, all within a Dynamics 365 Business Central company using Payroll NOW and Project Pro.
- Within Project Pro, a job is created (i.e. Building Office Remodeling).
- Once the job has started, time sheets are created, selecting the job, tasks and recording the date on time.
- After the employee submits their time sheet, the project manager approves, and then it moves on to payroll for processing.
- Once the time sheet transfers to the payroll department, Payroll NOW processes payroll, including: earnings, deductions, withholdings, employer tax, direct deposit, employer contributions, etc.
- When payroll processing is complete and employees are paid, the payroll posts to the Business Central general ledger all from within Payroll NOW.
- Journal entries are then transferred to the job journal showing the full burden of the employee’s labor for the pay period.
Give Your Project Management Tracking a Boost
Together, Payroll NOW’s Dynamics 365 payroll processing and Project Pro’s cost accounting management provide you with an accurate picture of your cost of labor expenses, without the headaches.
If you’re not doing job costing, it could be costing you customers. Make data driven decisions in order to better manage and grow your business. Contact
Written by Danny Clemenson, Integrity Data