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Structuring A Service And Parts Department

You may or may not currently have your own service and parts departments. If you do, what shape are they in? Have you set up your accounting records to accurately track sales and cost of sales, along with related expenses for those departments?

If you have your own service and parts departments, you should have already added service and parts department accounts to your general ledger to record the activity for the various sales and cost of sales categories and related expenses. Sales and cost of sales could be recorded as customer repair, service contract repair, internal repair, sublet repair and wholesale repair. You should always have a corresponding cost-of-sales account for each sales account (except for cost of sales – unapplied time). You would also have parts-sales and cost-of-sales accounts that mimic the labor-type accounts above.

Your service and parts department should be setup in your ledger similar to your used-vehicle department, with sales first, then cost of sales and finally gross profit. After gross profit, you should have the appropriate selling and variable expenses that apply only to the service and parts departments. Examples of these accounts are service and parts managers’ salaries, commissions, advertising, uniforms, policy work, other salaries and wages, training, employee benefits, other supplies, and data processing. Your technicians’ wages should be shown in cost of sales, not with these expenses.

Gross-profit percentages are very important if you want to show a profit in the service and parts departments. You should set your goals to achieve 70 percent for labor and 40 percent for parts. Accessories are normally priced somewhat lower, with a gross-profit of approximately 30 percent. Some would argue that you couldn’t afford to charge yourself these rates for internal labor and parts. The difference between these gross-profit percentages and what I see on some financial statements is normally immaterial to the vehicle gross-profit when reviewing the averages for all repair orders.

To compute the labor rate you should charge, take your average labor hourly technician cost, including any incentives for hours or parts sold, and divide it by 30 percent (100 percent less the 70 percent gross-profit you want to make) to arrive at the hourly labor rate you should charge yourself or others. For example, if your hourly pay is $15, then divide $15 by 30 percent to arrive at a $50 per hour labor rate. This will allow you to make a 70 percent gross-profit on your labor charged.

To compute the parts retail price, use the same formula. For example, if your parts cost is $15, then divide $15 by 60 percent (100 percent less the 40 percent gross-profit you want to make) to arrive at a $25 retail parts price. This will allow you to make a 40 percent gross-profit on your parts sold.

On repairs, you will normally have approximately $1 of labor charged for every $1 of parts sold. If so, you will average 55 percent combined gross-profit on labor and parts sales. On maintenance-type work, there will normally be more labor and less parts, as you are basically running through a checklist to see what the vehicle needs.

What should you sublet out? If you have the stalls and qualified technicians available, you want to do as much of the work yourself rather than give another shop the gross-profit you would be making on the repair. You should try to maintain a 15 percent gross-profit on any sublet labor you sell. This would include towing, tires and glass.

Accounting for all available labor hours versus the flat-rate hours turned will provide you with a technician efficiency report. The technicians should have two timecards. One is for clocking in normally at the start of the day, clocking out/in for lunch and clocking out at the end of the day. This timecard will track the total time the technician is on site. The second timecard is to track the hours charged to each repair order so the labor can be costed out and the hours turned charged to the appropriate sales account.

The difference between the total hours and the flat-rate hours generated is called unapplied time. The goal is to keep unapplied time to a minimum. Even though the technician may not be busy all the available hours, any differences should be documented on the repair order timecards so you know what they were doing when they had unapplied time. They could have been cleaning the shop or running for parts. If they are actually working, but not on vehicles, then their time should be charged to an appropriate expense account and not unapplied time (a cost of sales account with no matching sale account).

When I talk to most dealers who have their own departments, I find they are not tracking parts inventory very well. They may not be actually stocking the parts, but purchasing and re-selling them immediately. Most of the time it is due to lack of appropriate software or just not taking the time or resources to find out if all the parts you purchase are actually being installed on your vehicles or a car that doesn’t belong to you or one of your customers.

There is a great possibility of theft in the parts area. To protect yourself, use purchase orders, and let your suppliers know they are required. The purchase orders should have the repair order number on them and also a stock number if you are repairing your own vehicle. A random review of purchase orders and the repair orders they are attached to on a regular basis will hopefully reduce the possibility of theft.

Another tip is to not keep repair orders open for long periods of time. Close out what items you have completed, and open a new repair order if you are waiting on parts. If you do so, then your sales and cost of sales will be more accurate each month, and your internals will update the cost of your inventory much faster.  If you structure your accounting to accurately track service and parts activity, you will always know if they are profitable.

Vol 5, Issue 7


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