Last month I discussed the concept of job costing. This month I will explain the procedures necessary to implement a job costing system to understand how client profitability is analyzed. There are six steps that need to be implemented on the road to profitability.
Step 1: Identify the job that is the chosen cost object
This is simple, the cost object is a PR project or other engagement (hereinafter referred to as a "job"). Note we are focusing on the cost of one cost object that will be expanded to all clients of the PR agency.
Step 2: Indentify direct costs for the engagement
Usually in a professional service organization there is only one significant direct cost - professional labor. Each PR professional keeps a daily time record for tracing professional labor hours to individual PR jobs. There may be other direct costs associated with the job. They key is keep track of these costs by client and posting the costs to the time and billing system. If this is not or cannot be easily accomplished, the costs will be considered and indirect cost. For future reference, let's assume a job incurs 800 professional hours at an average direct cost rate of $51 per hour.