In most accounting systems, there is a job cost accounting module. Job costing helps you match the “Big Rocks” of Labor and Materials to a specific Sale.

You can use purchase orders to help you put the information in the right account. Don’t overdo the purchase order systems. If you use your accounting system to generate the PO, then you must reconcile each PO once the packing slip shows up with the order. Why not use a manual system – a simple paper and pencil form that lists the Material requested. This makes reconciliation a lot easier. A manual system can work great to help you accomplish the main objectives of using purchase orders:

All Material purchases are approved.
The Material is coded to the proper Direct Cost account.
The Material is coded to the proper Job.

Job costing works like this: Let’s say you put a bid (a mini Budget) together for a bathroom remodel for Mrs. Fernwicky. In that bid, you have a guesstimate of the Labor and Materials costs. Enter that information as a Job in the Job costing module. Give it a Job number. Make sure your Plumbers are held accountable for indicating which Jobs they work on on their Timecards. Then, when you enter Payroll data into your accounting system, there is a field which allows you to “flag” the information with the Job number. The accounting system will send a copy of the Payroll info to the Job file. When you enter Materials, “flag” the appropriate entries with the Job number. This will send a copy of the Materials information to the Job file. Then you can run a Job Cost report for the Fernwicky remodel project and see how you did compared to the bid, the Budget. Don’t fuss with applying overhead to Job costing. It is a baloney number at best. Sales – Direct Costs = Gross Profit. The Job will be won or lost at the Gross Profit level.

I have seen first hand lots of big, profitable companies with low tech and highly effective purchasing and warehouse systems. Keep it lean and mean. Stock the trucks right. Replace what is used every day. Carry as little stock, inventory, as possible.

If you are technologically obsessed, you could use bar coding and tight warehouse management to keep purchases up to date in the computer. Maybe the best option is to have your main supplier help you organize your bare minimum warehouse stock…and even offer to store it on consignment at your shop. There are several ways to manage your Materials. Keep score and you will know if you have a problem. You will be able to see if the “Big Rocks” of Materials are out of line as a percentage of the associated Sales Divisions.

It’s all about the patterns. Watch the patterns and look for exceptions. When something is out of line, dig deeper. Make sure that the accounting is accurate…that the “Big Rocks” went into the right Buckets. Then, get out in the field and see what’s happening with Labor and Materials. If you can, make operational improvements that will reduce your Labor and Material expenses. However, if you need to raise your prices…raise your prices. Don’t try to make “stone soup” by squeezing Labor costs. Pay your people well and price accordingly. Charge enough to make lots of money…even if you make a few mistakes.

Finding and solving the challenges is easy when you are paying attention…and have the “Big Rock” data. No need to argue. Just engage job cost accounting, a simple approach to overhead expense allocation and a look at actual hours spent compared to hours bid. The truth will be revealed.