The process of gathering information about costs associated with a specific task is job costing system. This information may be required to submit the cost information to a customer under a contract where costs are reimbursed. This information is useful to determine how accurate a company’s estimating system is and thus allow it to quote prices that provide a reasonable profit. A Job Costing System needs to gather the following types of information:
Direct Materials: The job costing system must be able to keep a track of the materials used or scrapped during the lifetime of a job.
Direct Labour: The Job Costing System must be able to keep track of time for which the labour has provided their services. If a job is related to services, then the direct labour may cost all the job cost.
Overhead: The job tracking system assigns an operating cost to one or more cost pools. When an accounting period ends, the total amount in each cost pool is assigned to various jobs depending on some allocation methodology.
Now once a job has been completed, it is necessary to indicate in the job costing system that the job has been completed otherwise it will continue to attract an allocated overhead charge at end of each accounting period. As long as the job is not completed, the compiled cost is recorded as an inventory asset. Once the job is completed and the customer is being approached for the billing, then the cost is shifted to the cost of goods sold the account.
Your Job Costing System is the most important part of your business and helps to maintain the workflow. It is of utmost importance that the job costing system is audited like any other essential parts of your business operations to avoid any problems in the future.
The reasons that the Job Costing System should be audited are:
Changes in material costs
Material costs experience changes over a period of time due to various factors. For example, changing the cost of fuels can drastically increase the material cost, or new technology can deduct the significant cost of manufacturing the materials leading to a huge drop. It is important staying on the top of material cost changes, ensuring that you aren’t overcharging your customers or under-pricing your jobs. The frequency of auditing material cost entirely depends on the following factors: Making huge alterations in the suppliers, changing the state of innovation in your industry, and altering your geographic location. For instance, for the natives of Alaska, fuel costs are a big deal because you’re far away from any supply chain. By watching your material costs, you can change the suppliers or shift from certain materials entirely only if the cost spikes too high.
Not accounting for increased employee experience
If you are an expert in the domain of business, you have employees who are good at a specific job or task, have given their maximum time to the company, and most importantly have gained a wide range of experiences with the services you offer for your clients.
Issues with scaling
One needs to scale up and deal with complex projects with a job costing system, just having a good system is not enough. The job costing system needs examination at regular intervals to ensure it’s meeting the company’s demands and needs or not. If it cannot handle the costing of your business needs as it grows, you must make a list of important features and redesign your existing job costing system.