August 26, 2020 | Payroll Software | Posted by Ascentis
Why Accurate Labor Costing is Imperative to Your Bottom Line
Not all jobs are created equally. A business that tries to apply a one-size-fits-all approach to pricing without job and labor costing is on a path to confusion. Determining the financial role labor plays in each project is essential to estimating a job’s total cost of production, which in turn helps set a price for the finished product or service.
Labor costing should be of particular interest to CFOs and finance teams, as it is a vital part of budget forecasting. Understanding the total labor costs associated with each project creates a ripple effect impacting nearly every financial aspect of a business, from purchasing to payroll.
Accurate labor costing requires an understanding of the requirements and skill sets associated with each task, as well as differing rates of pay that may go along with them. For example, a manufacturing job might involve a piece of equipment that requires safety training that only senior employees receive. Since assigning lower-paid, entry-level employees to that task is not an option, the higher labor cost needs to be figured into the total job cost. On the other hand, a task that can be handled by an entry-level worker should probably not be assigned to a higher-paid, more skilled employee, as this will needlessly drive up the overall cost of the job.
Other labor costing considerations include the hours required to complete a job – a project that requires input from night-shift or weekend workers may have different costs than one that can be completed by day shift employees. Likewise, a project that is likely to require overtime hours will incur steeper labor costs than one that can be completed in the scope of a 40-hour workweek. From a financial perspective, it may make sense to determine desired labor costing levels by working backwards. Itemizing the costs of each job before moving into the scheduling phase helps a CFO understand exactly what skills and certifications are needed for specific tasks, and how frequently those tasks are performed. Once these factors are sorted out, the financial and human resources teams can work together to build schedules that make sense for both the project and the bottom line.
In the past, these kinds of job costing efforts required extensive (and expensive) manual research, involving multiple spreadsheets and complicated cost calculations. Today, job and labor costing forecasts have been greatly simplified by automated tools that pull information from your time-tracking, payroll, and budget processes to create an accurate, dependable picture of the true costs associated with each job. An automated, customizable scheduling system can also help track the skill sets and certifications required for each task, making sure that necessary roles don’t go unfilled and qualified workers are scheduled for tasks that make good use of their training and skills.