Standard Cost Manufacturing VS Job Cost Manufacturing – Understanding the Differences

I love to take factory tours. There are big overhead cranes, Sparks flying around from welding machines, and large thuds as the 4 Ton Sheer cuts the sheet metal. As I walk the factory floor, I look for the key indicators of Job Shop or Standard Shop operations. It is not just what the company is making, but who they are making it for. It is also about the complexity of the Finished Good. Are they repairing a product or making a brand new item? I want to share 3 key differentiators: Duration, Labor Application, and Revenue. These will help you separate a Standard Cost Shop from a Job Cost Shop.
Let me start with Duration. How long does it take to produce the product or provide the service to the customer? If a Job takes less than 3 days, I doubt there is any need to track projected cost at completion. The job happens so fast, and the next one begins before anyone has a chance to review the results of the previous job. If a Finished Good is produced in 3 days, my first guess is that this is “standard cost manufacturing”. This means that during Product Design the expected cost was estimated (Labor and Materials). Maybe a time study was performed to calculate the expected labor, but the guys on the shop floor are not turning in a time card that says “8 hours of Welding on Job #4598”. In fact they probably ‘clock/in’ in the morning, work all day, ‘clock/out’ in the evening, and go home. There is no Labor Allocation on these short duration Jobs.
However, on a long duration jobs (> 2 weeks), there is lots of Labor tracking. On a long duration job you have time to review and analyze the actual hours that go into a Job. Time usually gets into details like; Painting, Welding, CAD Drafting, Training, Installing, Testing, and Delivery. Your business has evolved over the years with a “culture” of detailed labor allocations. Somewhere in the past I bet Us Industry And Trade Outlook Report you blew the budget on some big job and the cost of welding was 80% higher than you expected it to be. It was only through the detail time reporting that the shop manager could go back and see where the costs had been so excessive. So now everyone turns in a daily detail time card showing what they worked on that day. The records are tabulated and compared to the expected cost. This is a Job Shop Model.
Now combine these first two factors: Job Duration and Labor Allocation and you can begin to see the separation between a Job Shop and a Standard Shop. If a Job is less than 3 days, there is no formal estimate created, and there is no time for a percent of completion calculation. A standard shop will often run the same part over and over for the same customer and often in very large quantities. Example: Ball Point Pen Manufacturing, Furniture Manufacturer, or a Picture Frame Manufacturer.
Let’s add a component of Revenue and it becomes even more obvious. If you produce a very large and unique Conveyor System for a customer, you not only track the cost to produce, but you also track the revenue associated with the Job. Hence a “Make to Order” manufacturer is more likely to associate the Revenue Plastic Moulding Business Ideas to a Job and the Cost of the Job to calculate the Job’s Profitability. A “Make to Stock” manufacturer typically is putting product into stock based on a production forecast or multiple blanket orders. MTS Production is more designed to refill the Bins, than to analyze the projected cost to complete.
When you are searching for new business management software, keep in mind your business model. There is a big difference between Standard Cost Manufacturing and Job Cost Manufacturing. Notify your prospective vendor early in the sales process of your current business model. Be sure you are constantly thinking of your business model as you evaluate software for your particular manufacturing business.