#000112 Job Costing

Hello I’m Gary Shotton and today I’m going to talk about the subject of “Job Costing” and how do you job cost. Well, first of all a little background. I’m sure you’ve heard some of this have you been listening for a while but I came through a background of farming and ranching and then to working at an oil company for about nine years and then 17 years I own my own trucking company where we move furniture. And now I’m sitting here I own a machine shop that’s a where we make these metal parts and we sell them to our customer that then assembles them in a final product. We don’t sell them to the end-user we sell them parts to the as a supplier to someone else and they assemble and sell it to the end-user and so in each one of these cases and especially the last two moving a storage company and a machine shop it was important for me to know what my costs were but not all lumped together like at the end of the month what’s the entire cost of everything we spent this month we need to know that you need to be working on your accounting need to be pretty good at your accounting need to be getting better at your counting you don’t have to be the bookkeeper that somebody else is going to enter the data but I’m an advocate that you need to understand how to read your financial statements so at the end of the month or maybe a few days into the first part of the next month you can look back and say hey for that month we either made a profit or we didn’t make a profit or we made this much profit or we lost this amount of money that’s obviously your income minus your expenses is your profit or loss. Basic 101, sixth grade math. But a lot of people don’t understand what’s involved with that. And they’re not good at reading those those numbers and I wasn’t for the first seven years of business ownership. I couldn’t understand what these financial statements look like. And I knew that I was working as hard as I possibly could and finally I went to my the guy that was my in charge of paying my taxes he helped me as a as a tax advisor and I paid him I said I’m not leaving this room until you give me a guide. Help me understand how to read my financial statements. So I could learn that and so could you. Now, job costing is another more detailed part of that because at the end of the month you may have done five jobs ten jobs a hundred jobs in our case we’ve done several thousand jobs in any given month every time like you see a pilot here of equipment that was a job and next to it is another pallet and that’s a job and so we have 30-some are forty some machinist all making parts and so we could have at least 40 jobs in process in one given day and in some jobs are short so one worker could maybe actually do two or three different jobs in one day and it’s up to us to know whether or not we make a profit on each individual job or how much we made or how much we wish we had made on each individual individual job so that then we can make minor adjustments over time to get this thing corrected so our goal is to make a fair but small margin of profit on every single job. Now, it won’t happen that way but that’s our goal because you’ll always have some jobs that made, “Wow I wish I had a hundred of these jobs because I’ve made so much money”. But next to those will be some jobs that you really didn’t make much money and the average of the two will be a part of that day’s production or that month whatever you’re looking at so the way you job cost you have to be set in some kind of a system in our case when we’re making these parts we have each job quoted if we buy the material and then we know how much time we have allotted anticipation to make those parts on a machine those machines have a certain hourly rate and we have a target we know what that price that amount of time should and when you add those together our hourly rate by the times times the amount of time that we were on that machine plus our material cost that’s our basic cost and we shoot per hour our profit well it’s not quite as easy as your first thing because unless you have a system it’s all kind of mushed together. It’s all kind of compiled together and you won’t really know whether or not you’re making a profit on your parts or not on this job or not. I bought this company some 11 years ago and is about 15 to 18 months into ownership, that I realized that the previous owners did not job cost and we had some parts that we’re making a slew of money on and we had some other parts that we were losing our shirts on it was terrible how much money we’re losing on these on these parts so I had to come with a master plan because I was job costing the previous owner did not. He was making a profit but he didn’t know which parts were making the profit and my thought pattern was this I didn’t want my customer to think that they find one that I’m making a lot of good profit on and they think I’m making profit like that on all of them or all of my good parts go to somebody else and all I’m left with is the bad parts the ones I’m not making money so I made a mass proposal I went to my customer and I just explained what had happened and I said would you allow me to do the math and I would create a scenario where I’ll raise the price on some parts but I’ll lower the price on these others and then net difference will be no difference in price to you. But, I’ve got to job cost. I’ve got to know where I’m at. And they let me do it. And it all worked out. Now, we’re pretty close we’re always adjusting just a little bit. Let’s pretend that you were a house builder and this happens sometime you go to the bank and you’re going to build a in a development let’s say 10 houses. And you get enough money from the bank to build the 10 houses. But you’re not good at job costing so in the first five or six houses you figure out things you make a little bit better you make this a little bit better and pretty soon you’re spending more money on those first houses than you should have and if you’re not careful you could get up to a house number nine on ten houses and, “Uat-Oh, I don’t have enough money even to build the tenth house”. Let me tell you the loaning institution, the bank, is not going to be happy for you to go in and telling them because you are losing money all that time all of those other nine houses that you’re building at a loss it just didn’t know it. Let’s talk about a pizza business. You should know what your ingredients are in pizza. You should know what your overhead is in running a pizza store. You should know how much how many pizzas a month that you can make and you should take your sum of all of your overhead that’s your indirect expenses, your overhead expenses, and divide it by let’s make it up ten thousand pizzas and so if you were to make ten thousand pizzas, and you decided that your that your overhead was twenty thousand dollars that month, guess what every pizza has two dollars worth of overhead it must cover and then you could talk about the ingredients and you can talk about the energy of the things that cost to make it as direct expenses but you need to know what your cost is on a job cost. Everything I can think of has some degree of job costing. Most things would. And if you will know those and work on that I think you’ll have power. You can maneuver through situations you know what to do. Not always can I get a raise. See, there was about two or three years when I was wanting to raise my price for with my customer I just had to set on it but I knew which ones I needed to raise I just couldn’t do it then well I hope this helps you we want to, “Inspire Better Business”. We want you to be better business person. We want you to be a profitable business person. This is volunteering on my part and along with everybody that speaks here. These are free to you, but we only ask that you would share these with others. If you’re a speaker and would become a speaker, We need that. If you would be a translator or transcriber, we need you to volunteer for that, if you would. But overall we’re here to bless you. Thank You!!