Unreliable job costing leaving you confused?

No one argues in favor of inaccurate job costing, right?

Because when your costs are wrong, your prices and margins can be wrong—which means profits are off too. You’ll also struggle to identify cost trouble areas, including products variations and much, much more.
All of this is bad.

Yet we see plenty of make-to-order operations suffering with, while not always aware of, incomplete and unreliable job costs.

Job costing is simple if you produce the same product day after day, year after year. And when a skilled workforce is consistently available or unnecessary for your products. And when all materials are pulled from stock or always purchased and consumed for every job.

Unfortunately, with the advent of the internet and a marketplace that wants everything custom and immediately, those simplified business models are difficult to find these days.

What are the particular job costing symptoms, challenges and solutions for complex product operations like make to order? Read on.

Make to order job costing is a challenge

Reporting accurate job costs (or job order costs as some refer to them) is a challenge when every item you make is unique in some way. Accounting wants to put the costs for each job or product in a bucket. But when you produce 500 or 5,000 buckets of cost a week or day, it is easy to see how your systems might be challenged.

The impact of inaccurate data can cause you to overcompensate your sales team. Rewarding salespeople with commission without accurate costs can create a cycle of low margins even though the jobs appear successful. And how do you sell smarter or produce better without understanding a job’s cost?

Fortunately, these issues are fixable, possibly using tools you already have. Your current system provider might offer a reasonable add-on. Left uncorrected, though, systematic job costing errors and their impacts just keep on happening. Which explains why, to get the efficient job costing capabilities they need, many companies elect to upgrade their systems.

Common causes of unreliable job costs

1. Not including all parts in the bill of materials in job costing

Common sense, right? It gets difficult when the amount of product is variable (and the variation is not recorded) or the item is considered nominal. There is a threshold for inclusion, but many nominal parts can add up to a significant missed cost.

Make-to-order manufacturers work in a world of complex products and customizations. More than just raw materials need to be included in job costing. The question is which items are worth tracking and do they need tracking at the item level or with average over time estimates?

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Your system should give you the ability to be aware of and capture significant costs to provide all teams with accurate costing.

2. Unable to update BOM during production

In woodworking, it is common to make material adjustments during products. There might be knots in the wood or the finish doesn’t look right. In industrial machinery, designs are frequently adjusted for welding, part fit and other design changes once manufacturing starts. This flexibility keeps production moving. However, if your system makes recording these changes a chore, workers skip it, and costs get missed.

3. Not including labor in job costing

For some products, labor is considered insignificant for job costing and instead included in overhead. But for many other products products—especially larger customized items—labor is significant and needs to be recorded. If you can’t accurately track labor routinely, you don’t know what a job costs.

When your systems can apply labor (and all other significant costs to a job), you can compare predicted to actual costs, which enables you to price better and track down issues. What’s significant is a management decision. Having the capability to capture costs, even if you think you might not use it immediately, is something you should require at least as an option in your next manufacturing system.

4. A bad tracking system or no system at all

Clearly, with no cost tracking system, you won’t have this information for decision making.

What can be less obvious is the impact of inadequate or inaccurate tracking systems. If this is the case, unreliable data is hampering your decision making.

Tracking in spreadsheets or low-end database applications is useful up to a point . These typically rely on manual data entry, though, which often gets overlooked. As you grow and the more costs you need to track and the faster your production, the more likely it is that costs get omitted.

The answers get more complicated when trying to manage hundreds or thousands of BOM’s in a SKU-based software solution. The maintenance becomes cumbersome and effort becomes too much to warrant the accuracy it provides.

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Compare manual or ill-suited systems to a comprehensive system with bar coding and you see again why companies choose to switch to a new ERP. They want to accurately quote jobs and easily compare predictive costing quicker than manual or SKU-based systems.

5. Overdoing it

I’ve seen the $00.001 labor cost for attaching a label applied to a job. Is it worth the time to track these to get the granularity required to maintain a BOM with this level of detail? Is it worth cycle counting these products?

Your accounting team can help you decide what’s significant. Keep in mind that just because you can measure something doesn’t mean you should. Like when the benefit of knowing something is less than the cost to record it. Paying more for a system that overwhelms you with insignificant data has a secondary cost as well: distracting you from what really matters.

What’s right for you?

Manufacturers want to know if they are really making their margins. Achieving this requires enough accuracy to identify significant cost points and variations from predictive costs.

A good solution helps you monitor production and implement improvements for years to come. The higher your sales volume, the lower the annual percentage of savings required to justify investing in appropriate job costing solutions.

The benefits should accrue cumulatively–find one percent savings a year for five years and your costs are five percent lower. Apply any percentage you think is reasonable for your operations, and you can project possible savings versus the cost to implement and work with job costing data.

There might be changes you can make right now in your operations to more accurately record significant job costs. Ask if your current system provider offers job costing or knows how to add it.

As you grow, the only solution might be a system with job costing capabilities that can handle the speed and complexity of your production.

Invest and it is possible you could discover you’re already optimally cost-efficient. We’ve never seen that happen. If you are optimally cost-efficient in your operation, being able to prove it (rather than just asserting or assuming it), is worth something too!

More reading

https://strategiccfo.com/mistakes-manufacturing-companies-make/