The key to being profitable in the custom business is to know the cost by the job. While it becomes clear at the end of the financial year if a profit is made or not, without job costing it is not clear where money is made and where it is lost.
Custom work by its nature is often subjected to unknowns, and it can often cost more than we bargained for. While experience can help a great deal in assessing what a new custom job will cost, often we are waylaid by market conditions as to how much a customer will buy our product for.
When business is slow the need to fill the shop, too, may necessitate a reduction in price. While cost and price have a relationship, hopefully allowing us to make a profit, cost is subject to material and labor costs plus overhead, while price is subject to the market.
So how then do we know the cost of a job before we price it? First we have to know how we are going to supply the job. Which of the components required are we going to make ourselves and which will we buy from known vendors? Then we have to determine what known processes are involved in making the components. We have to understand the method of getting it into the building and installing it. We know these steps; we have done them before.
While there are many highly sophisticated computerized methods to cost every operation at the appropriate workstations, there are less daunting alternatives. For example, we could simply check various operations by taking times with a stop watch. But there is a danger of coming up with results having little to do with reality.
Here is one way of job costing that can readily be done in conjunction with a cut and material list. Break down every part to its smallest detail and make a bold assumption, the assumption being that a man can do a number of operations per minute.
My experience here tells me that a man can do four operations a minute. For example to place a screw joining two parts will require five operations. Placing two workpieces on a table, drilling one hole, driving one screw and placing the assembled piece back on a cart or conveyor requires the said five operations.
An Excel database linked to the cutting and material list will automate your costing. As such, this would be a benchmark and only the beginning of an ever improvable management tool to refine not only your job costing but also the operations of your business.
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