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How to use job costing analysis to control labour costs?

Published: September 7, 2018

In light of recent increase of the minimum wage in several provinces and other worker-friendly changes, Canadian employers are facing very high labour costs that could potentially reduce their long-term profitability. Some companies are raising their prices in response, but a better alternative is to manage the expenses more adeptly and save on redundant or wasteful hires. One of the best ways to keep the expenses under control is to use advanced software solutions to execute an accurate job costing analysis and determine how much of operational expenses goes to pay for labour.

If you are not familiar with this accounting technique, job costing analysis allows for a very detailed breakdown of costs for a project of any size. Depending on the definition of a ‘job’, this procedure can be used in both manufacturing and service-oriented organizations. Here are the most impactful areas where job costing analysis can provide the most immediate benefits:

Identify different categories of costs

Job costing analysis starts from the assumption that every company incurs three different types of expenditures essential to its business model. Material costs include all the necessary physical goods that must be obtained in order for the job to be completed. Labour costs denote all the expenses related to hiring people to perform certain tasks, either as long-term employees or as service providers. Finally, overhead costs cover the items not specific to a particular job (i.e. office rent), but which must be paid for from the proceeds of several jobs. This simple classification can be very helpful for understanding the structure of expenses and formulating a plan to keep them within a certain range.

Separating direct from indirect labour

Another key step in job costing analysis is differentiation between two different types of labour. Direct labour is provided by the employees assigned specifically to the job at hand, for example machine operators or client-facing service providers. Those expenses rise and fall depending on the volume of jobs, so their accounting is closely related to revenues. Meanwhile, indirect labour is necessary on every job, and it typically comes from supervisors, quality controllers, marketing staff and other specialists. Those costs are less flexible than direct labour expenses, forcing employers to monitor the number of employees in such positions very carefully and adjust it to current demand promptly.

Proactive long term planning

Breaking down total costs into multiple clearly divided categories brings a measure of clarity to the corporate planning process. By bringing the organization a step closer to cost certainty, this method allows the management to grasp projected expenses much better and foresee critical periods when company finances might be challenged. This way, organizations can buy some time and implement long-term measures designed to reduce the financial pressure. Most importantly, proactive planning keeps ultra-expensive emergency labour hiring at a minimum while also helping the company to meet all important deadlines that affect its primary revenue streams.

Dynamic budgeting

An important feature of job costing analysis is the ability to create detailed and precise budget projections well in advance. As the activities unfold and real bills come in, projections can be compared with actual expenses, and the budget for the remaining period fine-tuned accordingly. Calibrations of the budget can reveal a potential shortage that must be plugged in immediately, or some leftover funds that can be redirected into another project. Either way, the organization benefits by acquiring critical information earlier and spotting trends as they develop, ultimately leading to better labour cost optimization for each particular job. Cumulative impact of those savings can be significant if the procedure is applied consistently as a matter of policy.

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