Job Costing Reports – Introduction (Part 1)

Job costing reports are management tools used to evaluate project or production performance against a known or estimated standard. They are used in many business sectors and their respective industries. The primary purpose of job costing reports is to identify discrepancies or beneficial results, usually in the form of financial values. They can be used to report both financial and numerical production outcomes.

Contrary to popular belief, job costing reports are not standard but customized reports driven by the purpose and the respective industry standards. This article introduces the concept of job costing reports, how they are developed and how to use them. My goal is for the reader to appreciate job costing reports and continue to read on with this series.

[do_widget id=black-studio-tinymce-7]

Concept of Job Costing

There are multiple forms of accounting in the business world. The most common and widely used form of accounting is done in conformance with Generally Accepted Accounting Principles. Some businesses stick to pure tax based accounting, customarily your smaller business operations. Other companies use their own customized accounting system. But another form of accounting is used to augment the above systems. I’m referring to managerial accounting. Another name for this form of accounting is cost accounting.

Managerial accounting is very common with the manufacturing and construction industries. Managerial accounting’s primary concept is to compare the estimated cost against the actual cost. Simply stated, a standard of cost is determined, then actual costs are calculated, the two are compared to identify discrepancies. One of the methods of managerial accounting is job costing. Job costing focuses on breaking down the project into phases or functions and comparing the estimated amounts for those phases/functions against actual costs.

Allow me to illustrate a simply construction project for a concrete contractor. This contractor breaks the job down into functions. Take note, the respective function can have several different types of costs such as materials, labor and equipment within that function. Take a look:

XYZ, Concrete Inc.
Job Costing Report
Project #17109
Estimated Actual
Logistics $8,209 $8,611
Mobilization 13,852 16,403
Forms
Materials 12,944 13,601
Labor 9,906 11,502
Equipment 4,750 3,850
Concrete 65,917 62,947
Labor/Subs 9,421 8,806
Molds 1,500 1,500
Finishing
Materials 2,210 1,905
Labor 2,850 2,603
Other 700 605
Totals $132,259 $132,333

Look at this closely. Notice that in the aggregate, actual costs were $132,333, a mere $74 over budget for the entire project. It appears that the estimator did a good job. Now, take a closer look. There are actually three phases with significant discrepancies.

Mobilization

Actual costs exceeded the estimated amount by $2,551. As an owner, you should be concerned. What is the driving cost that put this phase of the project so far out of budget? By pulling a detail report of this phase, the owner can assess what cost or costs drove the mobilization costs higher than anticipated.

Forms

When you subtotal the forms phase, estimated costs are $27,600, actual costs are $28,953. The total cost overrun of $1,353 is driven by the additional labor of $1,596. Why was labor so much higher than estimated? Were there too many employees on that job? Did the job conditions change between the estimating period of time and actual time to do the work? Were there weather conditions that drove this cost overrun. I find it interesting that the cost for equipment was lower than estimated. Did the contractor use labor instead of equipment to get the work done? Was equipment available and ready to use during this phase? Notice how objective results can be influenced by subjective criteria (weather, availability, conditions etc.).

Concrete

This one is really interesting in that actual concrete purchased was $2,970 less than estimated. This means that several yards of concrete were a) not poured, b) assigned to the wrong job, c) estimator over calculated the amount of concrete needed or d) the job isn’t finished. All of the above are important, especially since many concrete contractors charge by the volume of concrete poured and not the conditions of the job. If less concrete is poured, then it is quite possible the job’s revenue will be significantly less than originally planned. As an owner, I would want to know exactly what went wrong here to prevent this in the future. This part of the budget should be perfect every single time, especially since it drives many of the other costs in the other phases.

Note overall the importance of job costing, it’s primary concept is to compare actual against an estimated amount. The key to to managerial accounting is setting up the standards for use in comparisons.

Development of Cost Standards

Cost standards are developed over long periods of time. They are sourced from several information points. These include:

Industry Standards
Historical Results
Trial and Error
Contract Negotiations
Government Schedules
Business Ratios

In almost all cases, there is no one single source that acts as a cost standard. For example, suppose the only item sold is a piece of lumber, no labor, no delivery, nothing other than the piece of lumber. This would appear to be straight forward as to its cost. But is it straight forward?

Your supplier, can price a single piece, but he throws in a couple of variations. If you agree to buy in bulk, the price is lower per piece or if you agree to an earlier delivery, a discount applies. Even the sales tax can change based on the state’s law. Furthermore, the supplier may only offer the piece of lumber at this price for a given period of time due to economic changes in the price of raw wood affecting the manufacturers of lumber.

Notice how the price for a single piece of lumber has many variables involved? Therefore, creating a cost standard is difficult if not impossible.

The key is that no single function of a job is just sourced from one raw resource. Often, jobs require hundreds, if not thousands of input points including materials, labor, subcontracting, governmental compliance and equipment costs. Therefore, developing cost standards requires constant adjustments. Since most cost standards include tens, if not hundreds, of data points; any single one data point changing doesn’t greatly affect the aggregated total. Take a look at the cost standard associated with the purchase of actual concrete for the project above:

Concrete:
413 yards of concrete @ $116.43 per yard $48,086
Agents (Drying, Expansion Etc.) per yard 3,942
Delivery fee per yard ($21.13) 8,726
Fuel surcharge per yard @ $3.18 1,313
Reclamation/Environmental Tax per load ($20) 900
Holding fees expected @$75 each (15 units expected) 1,125
Expansion joints, tarps, insulated blankets 595
Contingency 1,230
Total Concrete $65,917

If any one of the line items above changes, it is highly unlikely to significantly impact (>3% change) the overall cost standard for the concrete. For example, suppose the concrete supplier sends out a notice stating that the fuel surcharge will increase to $3.61 per yard effective in the new year. This adds 43 cents per yard as additional costs. This equals $177.59 for the project. This is a mere .3 percent increase in costs, well below the 3% significance threshold. It doesn’t mean you ignore the change, you simply modify your future estimates to include the price change.

Many of these individual line items are developed over many years of learning about the respective subcontractors and suppliers. Imagine the detail related to the forms section of the estimate for concrete work in the first section above. This is why job costing is used. All these costs that nickel and dime a project or manufacturing process are recorded and the company learns from the details. Adjustments are made for future estimates and the cycle continues. Again, there is no one single source of data that sets the cost standard.

Development of cost standards come from multiple sources and variables. It is constantly changing and job costing reports help the contractor learn and improve performance. It is a never ending cycle of change. The key to job costing reports is the value they bring with educating management about changes.

How to Use Job Costing Reports

Change is inevitable. Prices for everything are in a constant state of flux. The key to long-term success is to embrace this economic change and use it to consistently improve the bottom line of your business. This is why job cost reports exist. Job cost reports help management understand economic changes and adjust their business model to accommodate changes.

In addition to helping management understand price changes, job cost reports help management evaluate performance. In manufacturing, job cost reports help identify the underlying issues that drive the overall final product cost higher. With manufacturing, product cost is driven by a certain volume over time given certain costs for raw resources and assuming certain waste factors. Job costing reports help management pinpoint which variable is driving the cost higher. Some reports are designed to identify volume, other reports, line losses such as higher default rates at certain production points while finally, other job cost reports are used to compare costs of raw materials against historical norms.

A good example is a confectionery operation. Job cost reports identify production volume against time. If volume decreases within a certain time frame, then management must address the underlying cause. Other reports identify the volume and waste associated with the raw materials, e.g. chocolate, sugar and nuts. When the reports are combined, the final actual cost of production per unit is compared against the standard.

In construction, it is very similar. Typical issues contractors face include environmental (weather, site conditions, legal compliance etc.), costs of insurance (builder’s risk, general liability, worker’s compensation etc.) and of course the prime costs of materials and labor. Job cost reports help the management team understand what drives the cost of the project and what particular underlying variables affected the results.

Go back to the concrete example used in the first section above. The subsection of forms (the process of creating barriers to form the concrete as it sets) is as follows:

Forms Estimated Actual
Materials $12,944 $ 13,601
Labor 9,906 11,502
Equipment 4,750 3,850
Sub-Total Forms $27,600 $28,953

This part of the job is over budget by $1,353. It is primarily driven by the additional cost of labor. Labor is over budget by $1,596. Management then asks the project manager why is labor over budget. The project manager responded with: “On the second and third day of the project, the crane could not reach behind the building as initially conceived, thus labor was used to haul the materials and forms to the designated sections”. Thus the reduced cost associated with equipment as the crane contractor did not charge for the additional time.

Take note, the reasoning was plausible, the decision made by the project manager was correct, but it drove up the costs for this respective function of the project. Management learned that in the future, either estimate for a crane with a longer reach or use additional labor to get the work done if the job site conditions are similar in nature.

Job cost reports are used to identify discrepancies. With this information, management then identifies the subjective criteria causing the discrepancy. The whole process is one step in the feedback loop of information processing with business. The concrete contractor learns from the job and in the future, should not make a similar mistake. ACT ON KNOWLEDGE.

ENGAGE MY SERVICES!
I’m here to help. My fees are more than fair and I often devote more time to an engagement than what is charged to the client. My goal is to ‘WOW’ you and solve problems. Click here for more information.

[do_widget id=black-studio-tinymce-2]