Preface: Whatever your line of business services, to ensure your business is managed effectively, you need Bob Cratchit’s math skills to calculate your costs accurately as frequently as every month.
Why Hourly Job Costing Analysis?
Donald J. Sauder, CPA | CVA (2015)
Do know your hourly job costs? Maybe you need an Excel document from Bob Cratchit ? Costs count, and accurate hourly job costing is a easy component when analyzing if your business is making a profit on an hourly basis.
If you have a team of service technicians who service computer networks, how do you know how much to bid on a new server install or client network upgrade? How do you calculate what to charge per service hour? If one technician works on three projects in a day, how do you begin to calculate your cost for upgrading a hard drive, repairing a server power supply, and resolving malware concerns?
So when you calculate costs of your technician wages at $40 per hour, you can see that your true cost for your business per billable tech hour is closer to $114 per hour to upgrade the hard drive, repair the server power supply, and resolve malware concerns.
With thanks to Bob Cratchit, here is a simplified method to figure hourly costs for your projects. For example, your service technicians costs $40 per hour including employee benefits, employer taxes, and perks. If a hard drive upgrade takes 3 hours, your cost is $40 x 3 = $120 for labor. So what should you charge? Let’s say you have five technicians who work a combined 420 billable hours per month. Your cost for employee wages is approximately $1,600 per week (40 hours x $40 per hour), and $6,400 for the month ($1,600 x 4 = $6,400 per technician, per month). Overhead for the five technicians is $175,000 a year in rent, utilities, office supplies, advertising, office staff, and sales reps. Your fixed cost for the service technicians’ salaries plus overhead is approximately $575,000 per year. At 420 hours per month average your five technicians would work 5,040 hours a year. $575,000/5040 = $114 per hour of labor costs per hour to break even. For an 8% net profit margin, you should charge at least $123 per hour ($123 x 5040 = $619,920 of yearly sales).
So when you calculate costs of your technician wages at $40 per hour, you can see that your true cost for your business per billable tech hour is closer to $114 per hour to upgrade the hard drive, repair the server power supply, and resolve malware concerns.
If you didn’t accurately figure the cost of your operating expenses in the above example, and billed $95 per hour, your business would have a loss of $96,200 for the year based on the 5,040 billable hours. However, if you can optimize efficiency from you technicians and have only 4 technicians working 1,260 billable hours per year (vs. five technicians working 1,080 billable hours individually) you could decrease service wages $76,800, and decrease operating expenses and service wages to $482,200 per year to an average of $95 per hour.
Perhaps you have a good sales rep and have five efficient techs working 1,500 billable hours per year, which would be 7,500 billable hours yearly. With an overhead cost of $175,000 and technician wages of $384,000 your total costs of $575,000 would result in a cost of $77 per tech hour at 7,500 billable hours. So if you billed $95 per hour you would net $18 per technician hour, or $135,000 with five billable service technicians.
In summary, accurate costing is key to profitability in any service businesses be it plumbing, cleaning, electric, snow plowing or mowing yards. If you are unsure or need your confidence boosted when calculating cost, contact your trusted advisor.
Whatever your line of business services, to ensure your business team’s costs are managed effectively, you likely need Bob Cratchit’s math skills to calculate your updated hourly costs accurately as frequently as every month.