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solarken
Level 1

Allocating labor cost of business owner when calculating and reporting Job cost and profit

Hello,

I understand how to allocate equipment purchases and checks received as income to a specific job that my contracting business completes, but I do not see an easy way to break out the hourly labor cost for me as the owner of the business, from the gross profit from the job. Even though I do not pay myself as an employee,i.e. with a weekly check based on my hourly labor, and I just flow through the profit on my tax return via Schedule C, I would like to know and track how much was truly net profit and how much was due to my labor on each job. Can someone explain how to do this? 

 

I saw a previous post that suggested to creat an expense account "Owners Job Cost Allocation" and an item "Owner's time", and then write a zero dollar check and put a negative number into the Cost field for the expense, and an offsetting positive number in the Cost field for the item to do this, but when I tried it, the Job Profit & Loss Report just shows 0.00 for the Owner's Job Cost allocation and does not reduce the profit by the cost of my labor.

 

Thank you.

5 Comments 5
BigRedConsulting
Community Champion

Allocating labor cost of business owner when calculating and reporting Job cost and profit

As a sole-proprietor owner, your time is not a cost to the company - to you - so actually entering a cost in order to see it on financial reports is inappropriate.  For the same reason you cannot donate your time and write it off as a donation, because it has no value (sorry.)

Still, you could use the Time tracking feature in QB to record your time, just so you know where you're spending it.  And then outside of QuickBooks you could mock up a report based on what you think your time is worth.

solarken
Level 1

Allocating labor cost of business owner when calculating and reporting Job cost and profit

I did not ask the question so I could do something that goes against IRS or federal tax rules.  I understand I need to report my income in a certain way as an LLC to the IRS, and I have no problem complying with that. With all due respect, what is appropriate in how I want to report on so that I feel my company is more or less successful is up to me, not anyone else.  My time DOES have value, and really is the one of the few things that cannot be replaced in the operation of my business.

 

The benefit of understanding Job Profitabiity while accounting for my time as the owner of a single member LLC spent on that project, is to better understand the drivers for and make better decisions to achieve increased profitability.  Without allocating a value to my time, it can greatly affect the profit. For example, suppose I spend 100 hours to complete Project XYZ, but only 20 hours to complete Project ABC, and the value of my time is $50/hr.  And suppose the QB P&L for the jobs shows $6,000 profit for XYZ, and $3,000 profit for ABC. Now suppose for simplicity that the total cost I charged the customer for each project was $50,000.  By looking at the QB P&L, I would see a 12% profit for XYZ, and only a 6% profit for ABC, and so may conclude that the XYZ project was more profitable and so I should try to replicate everything I did in XYZ in future projects vs how they were done in ABC.  But, if I include the cost of my time, then the P&L (w/owner allocation) Reports for each job would show $6,000 - $50 x 100 = $1,000, for XYZ, and $3,000 - $50 x 20 = $2,000 for ABC. This changes the picture completely, with ABC profit that is twice that of XYZ. After looking at these reports, I might see that the reason ABC was more profitable was because I used a subcontractor for a portion of the work which helped reduce my time on the project, which might give me insight into how better to plan future projects for maximum profitability, and how it might free up my time to work on other things, like sales. With accurate reporting, along with good forecasting, I could better determine how overall profit might be impacted by where I spend my time vs hire employees or subcontractors.

 

As I stated in my original post I did see a solution in a different post.  I went back and played around with the zero dollar "write checks" entry and I found that if I made the Expense entry a positive amount, and the Item side enty a negative amount, and had the job name selected in the field for both sides of the entry, I got a 0.00 cost in the Job P&L report, so therefore no change in reporting from the standard job profitability report. But if I removed the Job name from the Item side, so that the job name is only apled to the expense, then the report did allocate my time as an expense on the report, effectively lowering the profit and giving me the info I needed.

 

If there is a better way to do this, I would like to hear it. I don't know whether there is some negative impact that would show up on some other report, of having the Item side not include the Job name, but this seems to work in allocating the cost of owner time to a job.

solarken
Level 1

Allocating labor cost of business owner when calculating and reporting Job cost and profit

I did not ask the question so I could do something that goes against IRS or federal tax rules.  I understand I need to report my income in a certain way as an LLC to the IRS, and I have no problem complying with that. With all due respect, what is appropriate in how I want to report on so that I feel my company is more or less successful is up to me, not anyone else.  My time DOES have value, and really is the one of the few things that cannot be replaced in the operation of my business.

 

The benefit of understanding Job Profitabiity while accounting for my time as the owner of a single member LLC spent on that project, is to better understand the drivers for and make better decisions to achieve increased profitability.  Without allocating a value to my time, it can greatly affect the profit. For example, suppose I spend 100 hours to complete Project XYZ, but only 20 hours to complete Project ABC, and the value of my time is $50/hr.  And suppose the standard QB P&L for the jobs shows $6,000 profit for XYZ, and $3,000 profit for ABC. Now suppose for simplicity that the total cost I charged the customer for each project was $50,000.  By looking at the QB P&L, I would see a 12% profit for XYZ, and only a 6% profit for ABC, and so may conclude that the XYZ project was more profitable and so I should try to replicate everything I did in XYZ in future projects vs how they were done in ABC.  But, if I include the cost of my time, then the P&L (w/owner allocation) Reports for each job would show $6,000 - $50 x 100 = $1,000, for XYZ, and $3,000 - $50 x 20 = $2,000 for ABC. This changes the picture completely, with ABC profit that is twice that of XYZ. After looking at these reports, I might see that the reason ABC was more profitable was because I used a subcontractor for a portion of the work which helped reduce my time on the project, which might give me insight into how better to plan future projects for maximum profitability, and how it might free up my time to work on other things, like sales. With accurate reporting, along with good forecasting, I could better determine how to optimize profit by seeing where I should spend my time vs hire employees or subcontractors.

 

As I stated in my original post I did see a solution in a different post.  I went back and played around with the zero dollar "write checks" entry and I found that if I made the Expense entry a positive amount, and the Item side enty a negative amount, and had the job name selected in the field for both sides of the entry, I got a 0.00 cost in the Job P&L report, so therefore no change in reporting from the standard job profitability report. But if I removed the Job name from the Item side, so that the job name is only applied to the expense, then the report did allocate my time as an expense on the report, effectively lowering the profit and giving me the info I needed.

 

If there is a better way to do this, I would like to hear it. I don't know whether there is some negative impact that would show up on some other report, of having the Item side not include the Job name, but this seems to work in allocating the cost of owner time to a job.

userl-johnson
Level 1

Allocating labor cost of business owner when calculating and reporting Job cost and profit

Hi Solarken,

 

I have the exact same question. I think I may have found the same post you referred to with the negative expense and found that I had the same issue (it zero's out on the project level report). I'm also worried about removing the class from just the item side....have you found a workaround to this?

MichelleBh
QuickBooks Team

Allocating labor cost of business owner when calculating and reporting Job cost and profit

Thanks for joining in this thread, @userl-johnson.

 

I have here the workaround on how how to allocate job cost in Quickbooks Desktop (QBDT). 

 

I agree with BigRedConsulting that you can use time tracking to track the job cost. This way, you can track the expenses for a job and comparing those expenses to your revenue. Also, you can see how much money you spend and make for each job.

 

To begin, let's make sure that your item is set up correctly. Thus, your job cost reports are accurate and precise. Once confirmed, you can now set up a Customer: Job for each of your job. 

 

Here's how: 

 

  1. Go to the Customers menu, then choose Customer Center
  2. Right-click the customer name and choose Add/Edit Multiple Multiple Customer:Jobs
  3. Follow the onscreen instructions. 

 

After that, you can now assign all your expenses to jobs. Choose the suitable job in the Customer: Job column whenever you enter a bill, check, etc. The next step is to create estimates and invoices in your account. For the complete instructions, refer to this article: Tracking job costs in QuickBooks Desktop.

 

Once everything is done, I'd recommend running the job costing reports to see how your business is doing on a job-by-job basis.  See the available reports below for your reference: 

 

 

I've also added some articles about handling classes, costing, and customizing reports. 

 

 

Keep me posted if you have other questions about job costing in QuickBooks Desktop. I’m always here to help. Have a great day ahead!

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