InTents April/May 2020 - 44

business | tips and techniques

How to increase your bottom
line with job costing, part 2
Where does all the money go? Let's examine two job costing methods.
by Alexandre Renaud and Barbara Scull

I
Job costing basics:
A 2-part series
Dec. 2019-Jan 2020:
Accounting basics, including
a simple profit formula, and
concepts such as fixed and
variable costs, gross profit,
contribution margin and breakeven point.
In this issue: Using the concepts
from part 1, the authors outline
two approaches to job costing.

44 intents

0420IT_Book.indb 44

april-may 2020

n part 1 of this two-part series on
job costing, we reviewed accounting
basics for tent rental companies,
including a basic profit formula,
fixed and variable costs, gross profit,
contribution margin and break-even
point. Understanding these concepts
and applying them to your job costing
efforts before you price a job will help
you determine if a specific job will
contribute to your bottom line. As we
noted in part 1, projects that aren't
priced high enough can actually cost
you money!
Now we'll review two methods for
job costing.

Alex's method

Alex begins job costing by determining
these values:
*	 The volume of sales necessary for
his company to hit the break-even
point (BEP). This is the point at
which the company will cover total
costs (fixed and variable) but not
make a profit.
*	 The estimated total hours of direct
labor at BEP volume.
*	 His company's total annual fixed
costs (Fc). This is what it costs to run
the business for a year with no sales.
*	 His company's variable costs (Vc).
These are costs the company incurs
only when providing a product
or service. Variable costs may be
expressed as cost per hour of direct
labor, cost per dollar of sales, cost
per square footage or another basis.

Here's an example starting with some
hypothetical numbers. To accurately
price a potential upcoming project, Alex
determines these values:
*	 BEP = $3,000,000
*	 Estimated total hours of direct
labor at a volume of $3,000,000 =
51,400 hours
*	 Fc = $1,200,000
*	 Vc at a volume of $3,000,000 =
$1,800,000
In this example:

*	 Fixed costs per hour of direct labor
is $23/hour:

$1,200,000/51,400 hours = $23/hour

*	 Variable costs per hour of direct
labor is $35/hour:

$1,800,000/51,400 hours = $35/hour

Therefore, the average total cost per
hour of direct labor (with volume based
on BEP of $3,000,000) is $58/hour:
$23 + $35 = $58/hour

To estimate profit with a volume of
$3,500,000 in sales:

*	 Additional revenue exceeding
break-even point:
$3,500,000 - $3,000,000 (BEP) =
$500,000

*	 Contribution margin based on
$1,200,000 (Fc) and $3,000,000
(BEP):
Fc/BEP = $1,200,000/$3,000,000 =
40% (0.4)

3/23/20 1:25 PM



InTents April/May 2020

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