Job Costing Using Data Collection to Determine Estimated vs. Actual Profits
by Mark Porter, president
Dienamic MIS Software, Inc.
In any business, knowing costs is important. After all, isnt the mathematical formula Profit = Sales – Costs? If companies dont know their costs, how can they know their profits? Sure, at the end of the year anyone can say I made money or I lost money, but when businesses control costs and use cost data to make better business decisions they may not lose any money. Better yet, they may be able to say, I made more money.
Whether done via time sheets or shop floor data collection, job costing is the process of tracking every minute of every day of each machine and employee. This not only allows us to get accurate costing of how much each job cost to produce but also allows us to analyze all aspects of our operations.
Job costing involves several different aspects, one of which is data collection. Data collection, particularly when it comes to the shop floor, is one of the most valuable resources for determining exactly how much a single job costs. For instance, how much of employee John Smiths time last quarter was chargeable (rebilled), and how much was nonchargeable? How many hours did the company spend repairing that old Kluge press last year?
Collecting shop floor data allows companies to easily find this information. Furthermore, this type of information can allow companies to control their labor costs and make more informed decisions regarding the companys machines.
It is possible to extend this further by tracking characteristics of jobs. For example, what was the average running speed on 28×40 sheets of 10pt coated stock run 2-up on the Bobst press? How much time was spent waiting for customer ABC to do press oks?
This type of information can help with providing more accurate estimates. This is important because, if a job is quoted at 3000 per hour but only achieves 2500 on the shop floor the company is losing money as soon as it gets the order. Conversely, if quoting at 2500 per hour and achieving 3000 on the shop floor, the company is losing jobs it could be producing profitably.
Companies do not have to be limited by software analysis. All this data can be sent to software such as Excel, where it can be sorted and analyzed in ways that answer questions that are specific to individual companies.
A wealth of information is available on the shop floor every day. Companies simply need to start collecting and analyzing it to help improve productivity and profitability.
Purchasing for profit
Another piece of the job costing puzzle involves purchasing. All companies must purchase both materials and services in their day-to-day activities. The levels of those purchases can vary from industry to industry and from company to company. Certainly, the industries of print finishing, trade binding and diemaking are more labor-based than material-based, but purchases must still be made.
Whenever money leaves the company, accountability for that money is vital, as is confirmation of the expected value received for those funds. Purchase orders should be generated for all purchases. This includes items for specific jobs, materials for inventory, any outside labor services and general office purchases, such as supplies.
Whether written or verbal, issuing purchase orders is the same as writing a check from the company to the vendor. Whether the company makes many purchases or only a few, each purchase represents money leaving the company that should be controlled. A purchasing system should record every purchase order issued. This provides accountability of who is issuing purchase orders and where they are being sent. By making people accountable for the purchase orders they issue, companies will ensure employees are more careful with the purchases they make.
When goods or services are received they should be matched to the original purchase order. This helps ensure the full order has been received and serves to check if more was received than originally ordered. The print and finishing industries are so job-based, it is often a good idea to take a step back and view purchases by vendor and employees issuing POs.
By ensuring employees follow these procedures, companies can tighten their financial control of the business to ensure maximum success.
Job closing routines
Another valuable step in collecting job costing data is to establish a strong job closing routine. When a job is complete, is it simply passed to invoicing so that the customer can be billed based on the estimated amount? If so, a lot of valuable information is probably getting missed. Closing a job in an automated system should generate several useful reports and functions.
Close the job to prevent additional charges
When creating the invoice, the last thing companies want is to have employees still incurring costs against the job. Trying to get a customer to pay additional charges after the original invoice has been sent is, at the very least, embarrassing.
Once the billing process starts, part of the closing procedure should prevent additional time, materials and purchases from being placed against a job without a supervisor OK.
Full listing of all costs incurred
The job closing process should generate a report that lists all labor hours and costs material costs and purchases that went into producing that job. The company should be aware of all funds that went into the job. The closing report should offer the option to view the data by department, cost center, operation or transaction level.
Generally, these reports are viewed at a cost center level. This means there should be a total hours and total dollars report for each machine used on the job. If a cost center looks unusually high or low, drill down to an operation level to see if the cause was the makeready or run time. Identifying the source means being able to evaluate even further to a transaction level to see which employees worked on a job.
Actual vs. estimate report
This report provides a comparison of the estimated hours and costs for all labor, material and purchases for the specific job to the actual costs. This is a valuable report that can quickly identify actual costs that are not in line with the estimated costs. This could prove to be a onetime exception that nothing could prevent, or maybe it is a process that needs to be evaluated. If a machine is estimated to run at 5000 per hour and it is actually running at 4000 per hour, the company is losing money every time it wins a quote. Conversely, if it is running at 5000 per hour and with a quote of 4000 per hour, the company is losing jobs it should be winning.
When a job is complete, it should be possible to get a listing of all changes made to the job from the time it was agreed to produce the job to the final product that was shipped to the customer. It is important to track these changes, as they are needed to explain time and cost variances and, also, to help correct legitimate extra charges.
Collecting extra charges can be a great source of additional revenue, and having a complete backup of information about the extra charge i.e. who, what, where, why and when a change was made allows for recovering that extra charge without damaging the relationship with that customer.
Provide employees with a problem history system they can use to enter problems with jobs as they happen. When closing a job, a list of its problems can be viewed. These problems may help explain some of the variations and issues on that job. This saves the time of office staff to track down employees and ask what happened two or three days ago. Problem history is also valuable when quoting or running the same job in the future.
By following good closing procedures, companies can ensure that all costs are captured, all legitimate extra charges are recovered, all production variances are accounted for and all processes are running as efficiently as possible. Furthermore, by collecting data regarding the shop floor itself, as well as purchasing information, companies maximize their profits while gaining a better understanding of all aspects of the business.
Mark Porter serves as president of Dienamic MIS Software, Inc. He can be contacted at 800.461.8114 or by email at email@example.com.