InTents December/January 2020 - 50

business | tips and techniques

How to increase your bottom
line with job costing, part 1
Where does all the money go? Let's start with some accounting basics.
by Alexandre Renaud and Barbara Scull

ob costing is the process of assigning
costs to a speci ic job or project to
determine if it will generate enough
gross pro it to cover expenses and
contribute to net pro it. While managers
often engage in job costing after a project
is over and all of the numbers are in, it
is also helpful to use a job costing model
when you are pricing a project. Job
costing at the beginning of a project will
help ensure that you don't accept work
that doesn't contribute to your bottom
line. Projects that aren't priced high
enough can actually cost you money!

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

Accounting basics
Let's begin by reviewing some
accounting basics, starting with a simple
pro it formula:
π = R - (Fc + Vc)
In this formula:
* π = Pro it
* R = Revenue (sales)
* Fc = Fixed costs
* Vc = Variable costs
Here's a simple example: For a
project with revenue of $100, ixed
costs of $40 (40 percent of revenue),
and variable costs of $50 (50 percent of
revenue), the pro it is $10 (10 percent
of revenue).
$10 = $100 - ($40 + $50)

50 intents

dec 2019-jan 2020

Fixed costs (Fc) are invariable in
totality and variable per unit. Let's
consider a business with annual ixed
costs of $600,000 (invariable in totality):
* With sales of $2,000,000, ixed
costs are $0.30 per dollar sold.
* With sales of $3,000,000, ixed
costs are $0.20 per dollar sold.
* For 20,000 hours of direct labor,
ixed costs are $30 per hour.
* For 30,000 hours of direct labor,
ixed costs are $20 per hour.
To identify ixed costs, consider what
it would cost to run your business if you
had zero dollars in sales. What would it
cost to just remain open in 2020? This
could include rent, electricity and gas,
administration fees, amortizations and
any other costs that will not luctuate
based on sales for the year. Some
employee salaries could be considered a
part of your business's ixed costs.
Variable costs (Vc) are variable in
totality and invariable per unit. For
example, in a business with variable
costs of $55 per hour (invariable per
unit or per hour of direct labor):
* With sales of $2,000,000, variable
costs are $55 per hour.
* With sales of $3,000,000, variable
costs are $55 per hour.
* For 20,000 hours of direct labor,
variable costs are $1,100,000.
* For 30,000 hours of direct labor,
variable costs are $1,650,000.



InTents December/January 2020

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