Job Costing - An Execution Guide for Operations NSCA Best Practices Conference
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The document outlines a seminar on job costing aimed at helping operations staff understand financial concepts crucial for project management. It covers the importance of job costing for tracking project profitability, bridging the gap between sales and operations, and effective financial reporting. Key topics include budgeting, managing labor and materials, revenue recognition, and the significance of understanding financial margins in project execution.
Job Costing - An Execution Guide for Operations NSCA Best Practices Conference
- 1. Job Costing - An Execution Guide for Operations Brad Dempsey/Solutions360 Inc.
- 2. What gets measured … Gets done. The purpose of this seminar is to introduce financial concepts that will help operations staff better understand and manage projects.
- 3. Overview • Job costing is typically thought of as an accounting function • Margins are only getting tighter • Every point possible must be achieved in execution • The project team’s understanding of the financial aspects can make the difference
- 4. Overview • This course assumes that you are not an accountant
- 6. What we will cover • What is job costing? • Why do we need it? • The sales handoff • Project / Job creation • The budget • Resources • Managing material • Managing labor • On-going financial analysis
- 7. What we will cover • Project KPI’s (Key Performance Indicators) • Invoicing • Sub Contracting • Labor burden • Material burden • Over/Under billing • Change Orders • Sample jobs for analysis
- 8. Glossary • GM = Gross Margin – Dollar value of revenue minus cost of goods • GP = Gross Percentage – Percentage of GM / revenue • Price – what we charge the customer • Cost – what we pay our vendors • Brokerage – or box sales, simple sale of product without labor • T&M – Time and Material • Progress Billing – A job that we earn revenue on based upon our estimate and a fixed price
- 9. Alternate Course Names The 7 Habits of Effective Job Costing
- 10. Alternate Course Names How to Job Cost and Influence People
- 11. Alternate Course Names Game of Job Costing
- 12. Alternate Course Names 50 Shades Of Job Costing
- 13. Alternate Course Names Job Costing “r” Us
- 14. Alternate Course Names The One Minute Job Coster
- 15. Discussion - What Challenges Are You Currently Facing?
- 16. What we see happening • Margins are slimmer than ever • PM’s that watch job costing closely are achieving greater results • Jobs that are well managed and measured lead to better proposals
- 17. What we see happening • There is frequently a gap between sales / operations / accounting with respect to information sharing • Many operations teams have no interest and or visibility into the financial aspects of the job
- 18. What is a project/job? A project is essentially a unit of work that allows us to manage, measure and execute the delivery of products and/or services to our customer.
- 19. Why a project and why is the financial aspect so important? Sales are made based upon an estimate of the cost to deliver the goods and services. The accurate measurement and control of those costs are critical to the survival of the company. Project accounting (job costing) is a tool to help us manage those costs, and make adjustments if required as early as possible in the process.
- 20. Goals For This Seminar • Understand and appreciate the 4 GP’s • Introduce tools to help you improve your financial project management • Help bridge the gap between operations and finance
- 21. Do we really need to learn some accounting?
- 22. What is job costing? From Wikipedia, the free encyclopedia Job Costing involves the calculation of costs involved in a construction "job" or the manufacturing of goods done in discrete batches. These costs are recorded in ledger accounts throughout the life of the job or batch and are then summarized in the final trial balance before the preparing of the job cost or batch manufacturing statement.
- 23. Why Without a method of job costing, we don’t know which projects were profitable and why.
- 24. The Business Why Without job costing, we lack valuable knowledge to bid and manage the next job.
- 25. The Accounting Why Accounting standards (GAAP) dictate that revenue and costs should be in sync (Matching principle). The revenues and costs that hit our income statement are used to report to the bank and bonding companies. It is important to maintain consistent profitability to sustain our bank covenants and our ability to obtain performance bonds.
- 27. Assets • A spy working in his or her own country and controlled by the enemy. • The entries on a balance sheet showing all properties, both tangible and intangible, and claims against others that may be applied to cover the liabilities of a person or business. Assets can include cash, stock, inventories, property rights, and goodwill.
- 28. Liabilities • A company's legal debts or obligations that arise during the course of business operations.
- 29. Equity • Funds contributed by the owners (the stockholders) plus the retained earnings (or losses). Also referred to as "shareholders' equity".
- 30. Revenue • Funds received during a specific period, for products and services.
- 31. Expense • Costs incurred through operations to earn revenue.
- 32. Cash Accounting • An accounting method where receipts are recorded during the period they are received, and the expenses in the period in which they are actually paid.
- 33. Accrual Accounting • An accounting method that measures the performance and position of a company by recognizing economic events regardless of when cash transactions occur.
- 34. Company Level Reports • Income Statement • Balance Sheet
- 35. Income Statement • The income statement shows the revenues and expenses accrued over a period of time
- 36. Income Statement – Above / Below The Line • The “line” is the division between Gross Profit and Sales/General/Admin expenses
- 39. Balance Sheet • The balance sheets shows a snapshot, or a point-in-time • Includes assets, liabilities, equity • Assets = Liabilities + Equity
- 42. The 4 GP’s 1. Budget 2. Current projection 3. Invoicing position (Actuals) 4. Earned
- 43. Project Snapshot
- 44. The Sales Hand Off
- 45. 1. Budget • The original contracted amounts
- 46. 2. Current Projection • Current budget inclusive of – Internal change orders – Customer change orders • Internal change orders may be cost- only changes to the budget so that estimated cost at completion is correct
- 47. 3. Invoicing Position (Actuals) • Invoiced amounts and expenses incurred • This is an “accrued position” • Assumes customer collections and vendor payments are about the same period of time • Analysis of unpaid amounts should also be viewed
- 48. 4. Earned • This is what has hit our income statement
- 49. Simple Budget Item Budget Amount Contracted Price $100,000 COGS – Material -$50,000 COGS – Direct Labor -$20,000 COGS – Sub-Contract Labor -$5,000 COGS – Miscellaneous -$,1000 Gross Margin $24,000 Gross Percentage 24%
- 50. Cash vs. Revenue • An invoice billed is not always revenue, and a check cut is not always an expense – When a pre-paid service is invoiced, it becomes a liability on your balance sheet – When the service or product is actually delivered, and the cost is incurred, the revenue can be recognized – Deferred revenues and prepaid expenses are proper accounting, but they complicate discerning your actual cash position
- 51. Invoicing vs. Rev. Example 1 0 2 4 6 8 10 12 14 16 Project Start Month 1 Month 2 Month 3 Month 4 End Cash Revenue
- 52. Invoicing vs. Rev. Example 2 0 2 4 6 8 10 12 14 16 Project Start Month 1 Month 2 Month 3 Month 4 End Cash Revenue
- 53. Invoicing vs. Rev. Example 3 0 2 4 6 8 10 12 14 16 Project Start Month 1 Month 2 Month 3 Month 4 End Cash Revenue
- 54. Invoicing vs. Rev. Key Points • The gap between invoicing and revenue is critical to the sustainability of the business • A clear understanding of the contract terms is key for the operations team to help manage this gap • Payment for stored materials, draw schedule, and retention terms are all elements of the contract that impact cash flow
- 55. Breaking Down Costs Four major categories 1. Material 2. Labor 3. Sub-Contract 4. Miscellaneous How much detail should we use?
- 56. Breaking Down Costs Only justify more detailed information if such data would impact your decision criteria.
- 57. Cost Categories vs. WBS Work breakdown structure From Wikipedia, the free encyclopedia A work breakdown structure (WBS), in project management and systems engineering, is a deliverable oriented decomposition of a project into smaller components. A work breakdown structure element may be a product, data, service, or any combination thereof. A WBS also provides the necessary framework for detailed cost estimating and control along with providing guidance for schedule development and control.
- 58. WBS – See Example
- 59. Current Projection vs. Budget Item Budget Amount Projected Amount Change Contracted Price $100,000 $100,000 $0 COGS – Material -$50,000 -$55,000 -$5,000 COGS – Direct Labor -$20,000 -$20,000 $0 COGS – Sub-Contract Labor -$5,000 -$5,000 $0 COGS – Miscellaneous -$,1000 -$,1000 $0 Gross Margin $24,000 $19,000 -$,5000 Gross Percentage 24% 19% -5%
- 60. Revenue Recognition Methods 1. Time and Material 2. Cost to Cost 3. Hours to Hours 4. Complete Contract
- 61. T&M – Time and Material • Charge based upon delivered labor and material • Recognize expense of labor and material at time of invoicing
- 62. T&M – Example • Ship 2 displays on Jan 20 • Install the displays on Jan 22 • Invoice customer on Jan 31 • Jan 31 entry • Revenue $1200 material and labor • COGS – Material $800 • COGS – Install Labor $200 • GM = $200
- 63. Hours to Hours Revenue Recognition To do this, we compare actual hours against estimated hours. This ratio is expressed as a percentage Actual Hours ------------------------ Estimated Hours This percentage represents the completion of the project.
- 64. Hours to Hours Revenue Recognition e.g. If we estimate that a project will take us 500 hours labor to complete, and we have expended 200 hours of actual labor: 200 ------------ = .40= 40% 500
- 65. Hours to Hours Revenue Recognition This job was contracted for $50,000. So we have now earned: • 40% x $50,000 = $20,000
- 66. Cost to Cost Revenue Recognition To accomplish this on a project, we use the cost to cost method of job costing. To do this, we compare actual expenses against estimated expenses. This ratio is expressed as a percentage Actual Cost ------------------------ Estimated Cost This percentage represents the completion of the project.
- 67. Revenue Recognition e.g. If we estimate that a project will cost us $500,000 in material and labor to complete, and we have expended $200,000 of actual cost: $200,000 ---------------- = .40= 40% $500,000
- 68. Revenue Recognition This means our project is 40% complete, which also means we can recognize 40% of the revenue. So in this case, if our contract was for $1,000,000 Revenue earned = 40% x $1,000,000 = $400,000
- 69. Revenue Recognition Cash flow on a project is out of sync with the performance of the work. The relationship between revenue recognition and cash flow is very important as well. This represents our over / under billing. If we are over billed, we are using the customer’s money, and are in a positive cash position. If we are under billed, we are using our own resources, and in a negative cash position.
- 70. Revenue Recognition Managing the revenue recognition process is critical to strong financial statements on a monthly basis. The statements are critical to maintaining our bank relationship and covenants, and bonding relationships for performance bonds. Match revenue to costs – GAAP Revenue does not follow cash flow – important to understand the relationship Even out revenue recognition – Bank covenants, performance bonds
- 71. Retention • Common practice for withholding a portion of the contract amount until final acceptance • This dollar amount should not show up as a receivable and be aged • It must be included on the balance sheet as an asset
- 73. Retention Posting • $12,614 posts to project deferred revenue • $11,352.60 posts to AR • $1,261.40 posts to Retention
- 74. Backlog • The contract amount is what we have sold, and have a customer commitment for • Earned revenue is what we have delivered • Backlog is the difference • It represents essentially “guaranteed work” • It is important to compare closed job GP against Backlog GP. If jobs aren’t finishing on budget…then the backlog GP may be overstated
- 75. Backlog • See backlog example spread sheet
- 76. Labor and Burden Burden is the actual cost to a company to have an employee, aside from the salary the employee earns. Other than salary, costs include benefits. e.g. • health insurance • payroll taxes • pension contributions • technology and tools
- 77. Burden • Labor burden is usually a percentage • J. Smith earns $20 / hr • Burden is 40% • Each hour of project time posts $28
- 78. Material and Burden Material may also be subject to a burden. This could cover the internal handling costs for purchasing, warehousing etc.
- 79. Material Costing Methods Direct – Serialized Direct – Drop ship Inventory – Avg Cost, FIFO, FISH
- 80. Material Costing - Serialized • Generally items over a threshold value • Each item has a unique number • Cost is captured at time of acquisition
- 81. Material Costing - Identified • Generally drop shipped or job allocated upon receipt • Commonly done on a P.O. basis
- 82. Material Costing – Avg or FIFO • Most commonly weighted average • Risk of costs not matching budget • Can be especially problematic when negotiating special purchase prices
- 83. Material Costing – Avg Example • Part # AB1234 • 5 in warehouse worth $500 • Average cost is $100 each • Purchase 5 more at $250 • 10 in warehouse worth $750 • Average cost is now $75 each
- 84. Material Costing – Burden Example • Part # AB1234 with a 3% burden • 5 shipped at $500 cost • Project costs allocated: • $500 debit to material expense • 3% x $500 = $15 debit to material expense
- 85. Material Costing – PPV • Purchase Price Variance • Difference of PO price and invoiced price • Can affect the job in a positive or negative way
- 86. Material Costing – PPV • We cut a P.O. for a display at $500 • On receipt we increase inventory value by $500 • On shipment to customer we DB the job $500 COGS material • Vendor now charges us $475 • $25 PPV must be applied somewhere
- 87. Allocation of In-Direct Costs Allocation of in-direct cost should be done using logical “cost drivers”. E.g., allocating superintendent time based on direct labor dollars to each job
- 88. Allocation of In-Direct Costs See example spread sheet
- 89. PM Allocation PM time should be direct cost to a job or allocated using a cost driver
- 90. PM Allocation – Cost Driver See example spread sheet
- 91. Change Orders
- 92. Change Orders - ICO • Internal Change Order • Changes the cost budget only • Possible reasons: • Equipment no longer available • Labor over budget • Unexpected installation challenges
- 93. Change Orders - CCO • Customer Change Order • Changes price and possibly cost budget • Possible Reasons: • Increased scope • Equipment models no longer available
- 94. Finance Costs There is an expense to financing receivables. In some cases, companies will allocate a cost to overdue invoices.
- 95. Minimum KPI’s and Reports • WIP • Gross Profit per Period • Labor Budget vs. Actual • Revenue Backlog • GP Backlog
- 96. WIP – Work In Process • Point in Time report, much like a balance sheet • See example spread sheet WIP
- 97. WIP – Analysis Tips • Sort by projected GP and look for the highest and lowest numbers • You will have a good idea of what is “normal” for you business (25- 35% possibly) • Analyze the outliers first
- 98. WIP – Analysis Tips • Use the same process as used for projected GP on earned GP • Hide columns and put projected GP next to earned GP and look for differences
- 99. Gross Profit per Period • Change over a period of time, much like an income statement • See example spread sheet Monthly GP
- 100. Labor – Budget vs Actual
- 101. Revenue Backlog
- 102. GP Backlog
- 103. Project Forecast See example spread sheet
- 104. Closing the Project Check list: • Invoicing complete • All material accounted for (shipped, cancelled etc.) • Material cost posted • All time bill entries logged and posted • All PO’s received or cancelled • All vendor invoices received (PPV)
- 105. Closing the Project • Misc expenses posted (expense reports, credit cards etc.) • All revenue posted • Lien and bonding documentation completed
- 106. Summary 1. Monitor the 4 GP’s frequently 2. Focus on budget changes 3. Break the budget down to a detail level you can manage, and one that will assist in making decisions 4. Gather job cost information early enough to take corrective actions
- 107. When will you start monitoring the 4 GP’s