What is job costing and why is it important for your production company

Has your production company, event planning firm, or interior design business dedicated months to a project only to look back at your bank account to wonder where the profit went? Are you looking for a tool to help you calculate costs, so the next job you take doesn’t leave you in that position again?

It sounds like you need job costing. 

Job costing is a universal cost accounting metric that almost every industry tracks to improve workplace efficiency and plan budgets. As a small business owner, you probably know by now that more goes into the cost of producing high-quality projects, and events than what meets the eye. All the labor, material, and overhead costs start to add up after a while. If you aren’t paying attention to the impact of these associated costs, it can put your company in a world of financial pain. 

Whether you’re a creative agency keeping track of a big SEO project your team is working on or an event planner wanting to understand the cost of an event you recently put together: Job costing is the go-to tool you’ll need. We're here to walk you through the wonderful world of job costing and how you can use it for your business. 

Let's dive in: 

What is job costing?

Job costing is a tool to help your company determine the cost of a particular job you’re working on. It’s a tool that allows you to predict the entire cost of a project. It’s can also be used to track costs throughout a job’s process and after it to ensure that all expenses have been accounted for and billed.

For example, both Nike and Google hire your firm to create campaigns. Before the job begins, you sit down with your project managers and plot out each client request to determine how much it’ll cost you to produce each campaign. You present these to your client, get approval, and get paid a portion of the total fee to begin.

Then throughout the next three months as you move into pre-production and production, you hire several contractors for both jobs, and incur many expenses, from production meals to renting additional equipment.

Each month, you’ll report to your bookkeeping team which expenses are associated with the Nike job, the Google job, and the company’s regular expenses. 

Why is it important?

Upon completion of the Nike and Google  jobs, you’ll be able to look back on your accounting records to understand how much each job earned, cost, profited and how accurate your estimates were. 

This information is valuable because it willl help you get better at estimating jobs so that you don’t underbill or mismanage your client’s expectations. If you bill your clients after the job for all the expenses incurred, job costing allows you to track those costs accurately. When working with really large corporations, this level of organization may be necessary in order to receive reimbursement.

Ultimately, it’s essential to know how much money a job has earned in profit to ensure that you’re actually making money. It sounds silly, but some companies work jobs they end up losing money on. In other words, the client pays them $10,000, but they spend $12,000. ThIat’s a $2,000 loss that the company has to make up on another job. Think about it like this: the company is paying their client $2,000 to do the job! 

Job costing is also important because it can help you determine whether you can afford to take on jobs that might not generate a big profit but will be beneficial in other ways. For example, doing a job for your friend’s new company that has a small budget or taking on a smaller job that a junior memeber of your team to handle on their own.  

The job costing method gives you a clear picture of profitability. This will help you budget, plan for upcoming projects and manage your team more effectively. You might decide working with a particular client isn't worth it the next time they ask for a bid.

How to go about it? 

When you work with a bookkeeping team like ours, the best way to track job costs is to keep track of your costs either in a spreadsheet or by using a tool like Expensify or Tallie. The act of assigning a job to your transactions is called “coding expesneses”. 

The key is to be consistient about keeping track and coding job expenses. Commit to doing this every week (or at the end of every day!) so you don’t fall behind and forget what these expense were for. Often times, more than one person at a company may be charging expenses for various jobs. This further highlights the need for demanding consistient processes and procedures when it comes to submitting expense reports. 

Your bookkeeper will further categorize costs into labor or material costs. Accurate bookkeeping records are dependent on keeping accurate data. It’s important to have high standards of accuracy because these records and reports are used to understand profitability,  prepare invoices, file taxes, to make decisions about the business and data for estimating future projects.

If you don’t work with a bookkeeping team like ours, you’ll need to implement a workflow for keeping track of allocating labor, material and overhead costs correctly within your bookkeeping program. 

What happens if you don't job cost?

If you don’t use this method, you’ll never have a clear picture of your finances or profitability. You’ll be flying blind, and it'll probably be too late when you realize that you’re losing money on jobs. 

Job costing provides you with a clear understanding of your opportunities and challenges. It’s a guide to help you know where you need to cut costs, if you need to raise rates or both. Without job costing, you may never understand your return on investment or know the true revenue. 

Ask yourself if this is something you can risk. Especially during the early stages of any business or when the economy is experiencing a downturn. The nitty gritty accounting details may not be the most thrilling part of owning a business, but they are among the most worthwhile to keep track of.

It's important to note, job costing isn't a foolproof way of looking at your projects. Cost accounting will never be 100% accurate. This is mainly due to how you choose to measure overhead costs. The method also doesn't consider inflation or any other outside influences. 

However, when you're starting to get your footing as a small business or taking on new projects at work: It's a necessity. Without it, you may not have a firm understanding of budgets, or you could spend too many hours on low-profit projects.