Job Costing: Using payroll data as the basis for analyzing profit and loss by job

Last week we did a deep dive into calculating a fully burdened rate for estimating and job costing. Another method you can use for job costing is to use payroll data directly. This method avoids the need to calculate a blended burdened rate and the accounting adjustments that often come with that process.

Since you are using the actual labor expenses as the basis of your job costing your job costing will be precise. The profit and loss analysis will be based upon the actual labor costs for the employees that performed the work. In many cases, this is actually the preferred method of job costing. Its advantage is that your analysis is based upon actual labor costs and actual performance. When reviewing the progress of the project and the performance of your employees you will be able to easily compare the true costs for work performed to your estimates and expectations.

If however, there is a high degree of variation in the rate of pay between employees that perform the same function and employees are considered interchangeable between jobs, then using a blended burdened rate is a better option. This is due to the relationship between job costing and estimation. In many situations you do not know which employee will be performing the work when preparing the bid. Using a blended burdened rate accounts for variation between employees up front allowing you to bid your projects with out having to worry about which employee will perform the work.

How to use payroll data for job costing.

Not all payroll processors properly support the allocation of pay by job, type of work and the other factors that you consider when analyzing P&L. Let’s look at the requirements for job costing payroll data from the perspective of the data processing.

One of the most important elements for job tracking is time tracking. Your employees must track their time by job so you will know how much work was performed on the job. When they track their time they will also record other information important to your job costing and expense tracking. Many companies require employees to indicate the type of work they are performing as they clock in. For example, when an employee clocks in they might select the 123 Main St project and excavation as the type of work they are performing. What is tracked changes from company to company. Job costing directly reflects your unique business model and therefore, the data you track will reflect that.

During payroll processing, this time data is used to calculate pay. I like to use the phrase “payroll converts hours into $$$s”. The process is simple:

Hours are recorded, verified, and approved
Hourly data is sent into the payroll system
Based on rules that have been set, the hourly pay is calculated by multiplying the hours by the correct rate
Other expenses like taxes are calculated

But as we discussed, the hours represent different work on different jobs. So, for job costing two things must happen:

Payroll expenses - gross wages and employer payroll taxes and benefits - must be allocated by the information recorded when the time was tracked
We must be able to link the allocated payroll expenses back to the information recorded with the hours tracked

You see, for processing the payroll results data for job costing it is necessary to connect the $$$s back to the information recorded during time tracking. That information in combination with other factors such as whether it was overtime or the employee’s department are required to meet the accounting requirements when processing the payroll data.

An Example

Let’s look at an example. Imagine a mid-sized construction company that does renovation work and residential construction. For this example we will look at 2 made up projects:

A new house construction at 167 Pumpkin Hill Lane
A bathroom renovation at 9437 Country Ave.

Your company has 2 divisions: New construction and Renovations. The workforce for each division is separate so employees of the new construction division never work on renovations and vice versa.

Blakely Brennan, a framer, records 23 hours doing framing at 167 Pumpkin Hill Lane at a rate of $27/hr for a gross wage of $621. Celeste Rosales records 7 hours doing plumbing at 9437 Country Ave at a rate of $33/hr for a gross wage of $231. Blakely’s and Celeste’s total pay or gross wages will be greater than just to $621 or $231 since they worked other jobs during the week.

So let’s dive into the handling of Blakely’s data. His total gross wages for the week are $1080 (he worked a 40 hour week) and the remaining 17 hours were spent on a different new house construction project - 7181 Walnutwood Lane. If properly allocated, the gross wages reporting from payroll will look like this:

$621 Regular Earnings
$459 Regular Earnings

The first step is to connect those entries to the time tracking to become:

$621 Regular Earnings - 167 Pumpkin Hill Lane
$459 Regular Earnings - 7181 Walnutwood Lane

And finally, to connect these entries to his division - New Construction. The result would be 2 entries for Gross Wages, each assigned to the correct job and with a class of New Construction. This would then allow P&L reporting by job to show the gross wages cost and divisional P&L to show the costs in the New Construction division. While this example only looked at gross wages, the same process is used to account for all labor cost expenses.

What is required

To make this work several very important things must happen:

The hourly data must be broken down by job and other related data
The payroll results must be allocated based on the way the hourly data was broken down
The payroll results must be linked back to the data recorded during time tracking

Dapt manages this process to ensure that all the requirements of job costing based on payroll results are met. Dapt integrates with Accounting, Time Tracking and Payroll to ensure that the data is properly handled at each step in the process. First, by preprocessing time tracking data and uploading that data into payroll. Second, by post processing the payroll results to create the exact accounting entries required for proper job costing.

In each step of the process, Dapt also implements the business logic required to meet your specific and unique business needs. We call this intelligent connection and the result to eliminate the rework and spreadsheets common in job costing.

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