Job Costing Corner - Capturing the Cost of Owner's Time
Many small business owners who take a draw succeed in capturing all of the costs associated with jobs except the cost of their time. The problem is that when you run a Job Profitability Report or a Profit and Loss by Job, any jobs that the owner worked on look far more profitable than they actually are.
There's a simple solution, but getting it set up involves several steps.
- If you haven't already done so, set the owner up as a vendor.
- Set up a new expense account in your chart of accounts called "Owner's Allocated Cost".
- If you don't already have a "Wash" or "Journal Entries" bank account set up in your chart of accounts, add a new account for that as well. This is an account that will be used to hold zero dollar or wash transactions. It isn't a real bank account and should never have a balance other than $0.00.
- Determine the owner's hourly rate for each service provided and set up new Service type items. (Do not use the same items that you use for sub-contractors.) Check the box that says "This service is used in assemblies or is performed by a subcontractor or partner". Enter the owner's hourly rate in the Cost field and the new "Owner's Allocated Cost" account in the Expense Account field. Enter the Sales price and your standard income account.
All set up? Now you are ready to start capturing owner's time for job costing. Use the QuickBooks Weekly Timesheets or another time tracking application that integrates with QuickBooks. If you aren't already tracking time in QuickBooks, you may have to turn on the preference for time tracking in order to access the timesheets. Go to the Edit pull-down menu and select Preferences. Time tracking is a company preference under Time & Expenses all the way at the bottom of the list on the left-hand side.
Record the owner's time against each job using the new service items you set up. On a regular basis, weekly or monthly, you will need to allocate the costs to the jobs. When you are ready to do so, open the Write Checks window using the Wash or Journal Entries bank account.
In this example, assume we are allocating costs monthly. Enter the month end date as the check date and select the vendor that you set up for the owner. You should see the "Pay for Time Worked" window pop-up with the following message: "This name has time in the company file. Do want this check to represent time worked?" Click Yes. You will then be prompted for the start and end dates, in this case, the first and the last of the month.
QuickBooks will then transfer the items from the timesheet to the Items tab of the check. Now click on the Expense tab of the check and enter "Owner's Allocated Cost" in the Account field and the amount of the check as a negative number in the Amount field. The total amount of the check should now be zero.
You will now see the items and costs associated with the owner's time on the Job Profitability Reports and on the P&L by Job, but because the items we set up point to the same Owner's Allocated Cost account as the negative amount on the Expense tab, there is no effect on your overall accounting.