Construction contractors, professional service firms, specialty manufacturers and other companies that work on large projects often struggle with job costing. Full cost allocations are essential to gauging whether you\u2019re making money on each job. But some companies simply lump indirect job costs into overhead or fail to use meaningful cost drivers, thereby skewing their profit reports. Here\u2019s what you should know to avoid this pitfall and get a clearer picture of your company\u2019s profitability.
\nIndirect job costs vs. overhead costs
\nThe Financial Accounting Standards Board defines job costs as \u201cthe sum of the applicable expenditures and charges directly or indirectly incurred in bringing [a job] to its existing condition and location.\u201d These may include direct costs, such as labor and materials, and indirect costs. The latter can be divided into two groups:
\nCosts identified with more than one job. These typically consist of benefits for frontline workers, workers\u2019 compensation insurance and insurance to minimize the company\u2019s liability risks. This category also may include company vehicle costs, such as gasoline, maintenance and repair expenses, and equipment depreciation.
\nCosts that are only indirectly related to jobs. Common examples of these indirect costs include project manager salaries and benefits, cell phone bills, payroll service fees, and vehicle tracking and monitoring systems.
\nIndirect costs and overhead are often confused. The term \u201coverhead\u201d refers to costs related to running your company that you can\u2019t attribute directly or indirectly to a project. They tend to be consistent over time. It\u2019s important to not include overhead costs, such as office rent, when identifying indirect costs.
\nUsing a cost driver
\nYou can systematically allocate indirect job costs using a \u201ccost driver.\u201d Two common cost drivers are labor hours and dollars.
\nFor example, suppose liability insurance for an engineering firm costs $100,000 annually. That amount divided by 12 months is $8,333 a month. To follow the allocation process through to completion, you would tabulate the billable hours for each job on a monthly schedule. Then, perhaps with your accountant\u2019s help, you could divvy up that $8,333 each month to put those dollars onto that month\u2019s active jobs pro rata. Now that $100,000 is no longer overhead \u2014 those dollars are indirect job costs.
\nOnce indirect costs are allocated and included in the reports given to managers tracking the progress of cash outflows to their jobs, your company\u2019s management team can discuss how to avert upcoming cash flow problems. This can buy you some time to make corrections.
\nMonitoring the bottom line
\nWe can find meaningful methods of allocating job costs to help evaluate your company\u2019s profitability. Contact us for more information.
\n\u00a9 2020<\/p>\n","protected":false},"excerpt":{"rendered":"
Construction contractors, professional service firms, specialty manufacturers and other companies that work on large projects often struggle with job costing. Full cost allocations are essential to gauging whether you\u2019re making money on each job. But some companies simply lump indirect job costs into overhead or fail to use meaningful cost drivers, thereby skewing their profit […]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[13],"tags":[],"class_list":["post-14363","post","type-post","status-publish","format-standard","hentry","category-aa"],"_links":{"self":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts\/14363","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/comments?post=14363"}],"version-history":[{"count":0,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts\/14363\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/media?parent=14363"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/categories?post=14363"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/tags?post=14363"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}