Chapter 1: Job Cost Accounting vs. Financial Accounting
Job Cost Accounting aka Job Costing fills a slightly different role than financial accounting. Financial Accounting is focused on reporting to external groups, like the IRS, banks, and investors. This kind of reporting is required to follow GAAP (Generally Accepted Accounting Principles).
Financial Accounting looks at a company as a whole. It tracks overall profitability for a given time period, usually a month, quarter, or year.
Job Costing is a form of managerial accounting that is meant to inform decision-making within a company. Managers can use expense data to find and remedy cost overruns, as well as improve profits. They can make staffing decisions, or purchase new equipment based on what info they find in the accounting records.
Job Costing can also be used to inform third-party stakeholders, such as a business who is building a new headquarters. The construction company can give them reports that show how progress is coming along.
The most important point of difference is that job costing focuses on individual jobs, rather than the whole company. Each job is unique, and it has its associated costs and profits. This data is recorded separately so that it can be analyzed on a job-by-job basis.
Of course, this data can be consolidated to gain an overall picture of company health, just like in financial accounting. But if a party needs more granular information, job costing data can provide detailed info on company activity.
Who uses Job Costing?
Any company that produces unique, one-off solutions can use job costing. An advertising company will have an entirely different workload from one project to the next. One client may require some consulting on a TV campaign, while another needs an entirely new logo and branding. The time requirements will vary greatly, and therefore should be recorded individually.
A caterer can work a number of different venues from weddings to movie sets. Their services could run the gamut from a high-end banquet to snacks and sandwiches. Compiling data from all these jobs would give an overall picture of the company, but it would lack the detail needed to make important decisions. Job costing would greatly improve their insights.
Finally, a construction company is a prime example of a business that needs job costing. Their projects often require a variety of materials, each with their own specialized workers and equipment. Each job will have its own unique characteristics, and should be tracked separately from one another. This will allow management to assess what's working for them and what needs improvement.
This course will focus particularly on job costing for the construction industry.
The Importance of Job Tracking
Why does it really matter whether you're tracking jobs individually? Let's consider a simple example of an ice cream maker.
Jim's Creamery produces custom flavors for a variety of customers. They are trying out a new vanilla ice cream with large chunks of raspberry pie mixed in. Because the ingredients cost more than their simple flavors, profit isn't expected to be as high for the new product. However, the new offering is quickly becoming a favorite among high-volume customers.
It looks like people really like the new flavor, they're barely turning a profit. Management quickly runs a job cost report so they can look at ingredient expenses in detail. They find that most ingredients are reasonably priced, but raspberry prices are outrageous. With this new insight, they begin looking for a new raspberry supplier.
As it turns out, there's a raspberry farm in the same region as Jim's Creamery. Because of their close proximity, they are able to purchase raspberries for a much better deal. They can now continue selling their premium product at the same price, but they will have more profit left at the end of the day.
Another quick example: A home renovator is not completing jobs very quickly. This prevents them from taking on new clients, which hurts profits. As they dig into their reports, they find that it's electrical work that's slowing them down. They decide to subcontract out electrical work, which leads to them completing jobs 12% sooner. This gives them time to take on more clients.
Summary
Job cost accounting focuses on job-by-job data. This data allows companies to find important details that can help them improve profits and run more efficiently.