Improving your profit margins with job costing analysis | Mitrefinch

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Improving your profit margins with job costing analysis

Published: April 18, 2018

You know that production affects gross margin, production means people which means it’s important to you. How productive and efficient your workforce is will be high on your agenda. But understanding how much granular information you can provide into decision making using job costing analysis can see you propel your business forward, fast.

 

Job costing analysis is the accumulation of costs (materials, labor and overheads) at a small unit level. Within industries that have tight profit margins, such as manufacturing, having this insight into line items can mean make or break.

 

By carefully reviewing the costs associated with each manufacturing line you can understand with greater accuracy where your profit margins lie, and identify areas to increase margins through lower staff costs or wastage reviews.

 

To create accurate job costing reports your calculations will involve:

  • Material costs – the combined costs of the raw component parts used
  • Labor costs – employee time spent on line and rate of pay
  • Applied overheads – an allocation of overhead costs from within your cost pools

 

Total Job Cost = Material costs + Labor + Applied Overheads

 

In a manufacturing environment job costing analysis can be assigned to a production line, including your work-in-progress inventory through to cost of goods sold to analyse the profitability. Collecting all data can be a time consuming process and when margins are tight, accurate data is all that matters.

 

Labor cost analysis is sometimes overlooked, generic wages applied and average time assigned to jobs. But what if you knew which employees, with the right skills, created you the highest margins? Profitability would increase allowing you to base forecasts on your insight.

 

A time allocation system allows you to accurately input a valuable third of your equation. With employee costs and time spent on a job varying, insight into this data can provide you with the information to make clearly informed decisions. Enable you to spot productivity trends based on employee outputs and make informed job allocations based on skills and wage – small changes that can make a big change to your bottom line.

 

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