In today’s environment, the role of a cost accountant in a construction organization is essential to success, and more importantly, is vital to avoiding failure. That may sound extreme, but in many circumstances, competition is so fierce and margins are so thin, reliable financial information and analysis certainly can make the difference between success and failure. Job costing is the process of assigning costs to custom products or services. Direct materials and direct labor are traced to individual jobs, and production overhead is allocated.
Job costing is a type of accounting which tracks the costs and revenues by job and enables standardized reporting of profitability by job. Every customer job has different costs, and that’s where job costing and a cost accountant will show value. A cost accountant works with relevant data from previous jobs to assist managers in building an estimate to get the customer’s business. Once the job is won, a cost accountant will work with the project manager to track costs accurately so the firm generates a reasonable profit.
Managers within construction firm may not understand how costs are allocated to individual jobs. They may misinterpret cost information and rely on irrelevant information. A cost accountant works to not only produce relevant information for each job decision, but also assists managers in understanding appropriate uses of cost information. When a cost accountant and manager work together in estimating the costs of a job and in keeping current job costs down, the firm will see more profit for each job.
In addition to direct costs incurred on a job, such as materials and contracting services, a cost accountant will properly allocate indirect costs to a job so there is a better understanding on all the costs associated with a job. In job costing, direct costs are tracked by job and overhead costs are allocated to individual jobs. An understanding of direct and indirect costs and how each affects profit will help the construction firm create more comprehensive and accurate bids on future work.
If a bid is made on a job, but does not accurately take into account the indirect costs associated with that job, the profit made on the job will be overstated. Using irrelevant or incorrect cost information to build a bid will cause a firm to earn less profit than expected with no real way of identifying the reason why. Indirect costs include all production costs except direct materials and direct labor. The salary of the manager overseeing the job, or the insurance required on the job site is all indirect costs that need to be allocated to the job to properly calculate the profit. Cost accountants are trained to not only associate direct costs to the correct job, but to also correctly allocate indirect costs to a job and present accurate financial statements for the firm.
Cost accounting is a valuable tool you use to reduce and eliminate costs in a business. The right cost accountant will work with your construction firm to properly account for both direct and indirect costs and increase the overall profit of each job.