How to Do Job Costing in QuickBooks Online
Perhaps you own a business that offers more than one product or service. You probably want to know which of those are the most profitable, but also which ones are unprofitable so you can eliminate them from your product line.
Job costing is a process of tracking a job’s expenses and income so that you have a clear idea of how profitable each product, or job, is. Knowing which products bring the best ROI tell a business owner what direction to take in the future.
QuickBooks Online has a new feature called Projects, which is a job costing tool for small businesses that want a better understanding of their operations and finances. This article will explain QuickBooks Online job costing in detail, as well as the type of small businesses that benefit from the process. It will also cover challenges that come with job costing, and provide a step-by-step guide for using QuickBooks Online with Projects for it.
What is job costing?
Knowing how lucrative individual jobs or projects are helps a business to identify its “core” products and services. By comparing data both from within and outside an organization (also known as benchmarking), you can determine the areas where your business has a particular strength and a comparative advantage over competitors.
Job costing tracks identified factors of jobs such as the cost of labor, raw materials and overhead, as well as the income generated from jobs. The data provides reports that management uses to make business decisions.
Many companies outsource their control functions such as accounting, analyzing data and reporting. In 2017, the revenue generated from global outsourcing of business processes, such as accounting, was $24.6 billion.
One advantage of outsourcing job costing and accounting is that the same person who is paying the bills is not the same person who is reconciling the bank account, as it can spell problems if an employee has control over both and is tempted to alter the books.
However, for small businesses, there is an advantage to keeping job costing in-house. If an external party is used, outsourcing opens up your organization’s operations to additional risk in terms of confidentiality. In addition, if job costing is outsourced, the controller functions are done by someone outside of the organization who may not have a full understanding of the company’s operations from the ground up. Any analyses and strategy suggestions will lack an intimate perspective of the business’s realities.
Using an online job costing solution means that a company’s operations and finances remain confidential. As a result, the data and resulting business decisions are made by those who know the company inside and out.
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Who benefits from job costing?
All businesses benefit from a job costing system that improves operations management and allows for good business decisions. A job costing system provides a basis for estimating future labor, financial and material needs, and helps to identify poor performance in workers, machinery or equipment or production processes. Without job costing, a company might continue to blindly produce an unprofitable product or service.
Linda Herron is CEO of SimpliProfit, a company that provides accounting, bookkeeping, advisory and consulting services, as well as training and ongoing support for QuickBooks.
According to Herron, the types of companies that implement and benefit from job costing are manufacturing and service industries that need to track sales and costs (labor, materials and others) to a specific job for a specific customer. That customer may have more than one job related to them. QuickBooks allows jobs to be added under the customer name to start the process.
“Job costing evaluates your job estimates to the actual results at the close of the job or even at the end of the month,” Herron said. “(Even though it can be a tedious process), this data is good feedback to improve your estimating skills in the future. In the end, your financial statements will reap the benefits of job costing done on time, as well as efficiently and correctly.”
Common problems with job costing
In the beginning, job costing involves some tweaking as you decide what you want to track and what types of reports you want to ultimately see from your data. Here are some of the common problems associated with job costing.
As Herron implies, despite the value of job costing, business owners often do not prioritize the administrative and organizational work that the process demands. For example, job costing requires careful tracking of each aspect of a job, such as inventory purchases, labor, sales and marketing, as well as overhead, administrative, accounting and financing costs.
According to Herron, one problem is not having good accounting and reporting procedures for each job.
“I have worked with many clients who had no idea how their jobs were performing,” Herron said, “But (if they give it) a couple of months and make some tweaks to some processes in operations and accounting, their gross margins can improve drastically.”
It requires the organization of paperwork
Job costing requires a long paper trail. Additional staff may be needed to manage paperwork and filing. Enterprise resource planning (a type of software that uses a central database to integrate business operations, including inventory and order management, accounting, human resources and customer relationship management), may help. However, small businesses still use paper documents that must be filed and organized, including invoices, quotations, timesheets, purchase orders and delivery documents.
According to a poll by John Mancini, president and CEO of the Association of Intelligent Information Management, only 17 percent of businesses work in what could be described as a paper-free office, and close to 60 percent still require signatures on paper for contracts and order forms.
Selecting metrics is complex
Job costing can become complex if a business has a wide variety of jobs and if it works out of multiple locations. The more variables involved, the harder it is to compare apples to apples, and the harder it is to decide what factors to track and benchmark. This level of job costing may require a combination of sophisticated systems and considerable human expertise.
“There are a series of task and controls that need to be in place to really get your arms around how well the company is performing on a whole and in detail,” Herron said. “The analysis should be done each month by utilizing job profitability reports in QuickBooks.”
Labor costs are problematic
Employees record time to wrong jobs and often stay clocked into jobs all day when they have been working on three different jobs, all of which makes accurate time recording difficult.
Herron recommends using the TSheets app on QuickBooks. “The TSheets app is an Intuit company tool that tracks time by each job, which then integrates to QuickBooks Online,” Herron said. “The benefits are tremendous for monitoring and reporting with ease in real time. I highly recommend this product for anyone who is doing job costing and tracking labor to jobs.”
Job costing in QuickBooks Online
Here’s a step-by-step guide to setting up project costing for small businesses in QuickBooks Online.
QuickBooks Online has a feature called Projects. This option is available to users of QuickBooks Online Plus. Users of Simple Start and Essentials will need to upgrade to QuickBooks Online Plus.
Step 1. Go to settings and turn on projects
- Select the gear icon at the top right of the page. Select Account and Settings or Company Settings.
- Select Advanced.
- Go to the Projects section; select the pencil icon to turn on projects.
- Check the Organize all job-related activity in one place box. Select Save, then Done.
Step 2. Set up your first project
Once you have entered your company information, you can set up your projects and start to input the project details that you want to track.
- Select Projects from the menu on the left.
- Select New Project.
- Enter a project name, the client and any notes. The example shows a small business that makes cakes and cookies. The projects entered are Chocolate Indulgent Cookies, which are sold to the client Giant Markets. The second project is wedding cakes, which are sold to the client Weis Markets.
Step 3. Enter project details.
Once the project is entered, fill in job details such as banking information, invoicing, sales, purchases and labor (workers). Then apply them to that project by clicking on the items on the left of the page. In the example below, by clicking on Expenses and New Transaction, expenses for cake ingredients supplied by Safeway stores and packaging from ABC Packaging were applied to the wedding cake project.
Step 4. Run project reports
The extent of reports that you can run depends on the details and transactions that you track and enter for each job or project. Individual reports can be run showing amounts paid to vendors, amounts paid in wages to employees, amounts spent on different supplies, income for each project, outstanding invoices and more.
Click on Reports and select the information that you would like to extract from the software.
The bottom line
Managing a small business to leverage its maximum potential requires organization and attention to detail. Job costing solutions can streamline the process and keep all of your data in one central and easily accessible place. QuickBooks Online with Projects provides extensive reports that can give a snapshot of overall business operations or the status of projects and finances at a given point in time.
Job costing with QuickBooks Online with Projects allows the business owner to make better decisions faster and before a project can become a drain on the bottom line.